The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that during the last week of trading the 200 day moving average broke through the 400 day moving average signaling a third “cross of death” that I will term the “cross of fiery gruesome death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.




THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent rally appears strong and Wall Street is feeling very optimistic, the prospects of a protracted bear market selloff are very real especially given the steady flow of poor macroeconomic, housing, consumer and employment data that will continue to flow throughout 2008.

Needless to say then next few weeks will be white-knuckle time…