Technical Sell-off or The Bite of a Secular Bear?

This is quite the sell-off.

It’s been so sharp and materialized so quickly that it’s hard to build a consistent story around it.

Is this occurring because of the European contagion or because China is slowing (by dictate) or because the majority of the simulative efforts by the Feds are now complete leaving our economy to come off the juice and likely writhe for the remainder of 2010 or a mix of them all?

While it’s probably a little of all the above, the most significant driver of this sell-off may simply be the collective memory of the last calamity and possibly a general disbelief that government propping was a proper and lasting solution.

The run-up since March 2009 has been so exceptional, most “investors” likely suspect that there is a disconnect between the equity markets and the state of the government sponsored “real” economy and are taking no chances.

Still, as Carter Worth pointed out yesterday on CNBC, the S&P 500 breaking through the 200 day simple moving average is not unprecedented even in the midst of a longer up-trend.

Two significant examples are the 1998 sell-off and the 2004 sell-off (noted by Worth) highlighted on the chart.

While we could be in the midst of a third leg of unwind of the massive secular bear market that commenced in 2000, from a technical standpoint, this could just be a short term pullback with the ultimate day of reckoning still far into the future.

Still, this is just a simple technical comparison and obviously can’t account for the myriad of troubling issues facing the U.S. and world economies today.

The secular bear trend continues to be fully intact with one decade lost and another starting on a weak note and facing serious headwinds.

The Almost Daily 2¢ - Twin Peaks!

Subtitle: Let the Losers Lose!

Hmm… this run has some legs.

Could I be wrong about a retest of the March lows? Sure… Should I be wrong? No.

Cheats, frauds and the unwitting should never succeed. I would prefer that all losers lose.

Our system, in principle, is simple ... if you make a serious financial mistake … a homeowner that buys too much house, a stock speculator that gets comfortable with perpetually increasing stock prices, a firm that over-debts itself and fluffs up its income, a bank or broker dealer that makes junk loans without due diligence, a government that creates programs that can never be properly funded or that create longstanding distortions... you lose.

It’s that simple.

That's the invisible hand at work… eventually all mistakes are corrected and not without pain... that’s what (… theoretically of course) makes our system so good... losers are obvious and their experience serves both as a form of creative destruction creating new opportunities for those that are more capable and also as an important lesson to those that are equally incapable.

If you believe that the system of bailouts and government meddling is OK... if you are now relieved and believe that the worst is over and anyone who suggests otherwise is just a perma-bear looking for trouble, you are likely simply benefiting (…or believe that you are benefiting) from all the bailouts and fraudulent dealings.

If the stock bounce has brought you a measure of confidence and worked to allay your fears of the future, you are taking too short a view of things… you should be far more fearful of strong central planners (… the Federal Government and the Federal Reserve) thoroughly manipulating your economic system from stocks to housing to banking and finance and beyond.

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As regular readers know, I have been following along the stock market decline for well over a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken well through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras have now become one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

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.



What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

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)
• H. Down Down we GO! (Uncharted Death)
• I. Bh Bye! (Fodder for the Sucker-Grinder)
• J. S&P 500 Blasts through the 50 and 200 day SMAs (The Cross of Life?)