It’s About Time…

$OEX Bull Market Durations

Interesting to see that not only are these three bull markets defined by clear uptrend lines but the previous two were essentially identical in duration. If history were to repeat itself, this bull market would have about 5 more weeks before printing the final top. I will say that is not my expectation as it would be almost too coincidental to play out that way. My guess is that we either fell just shy of the 5.25 year mark (as in the top is already in) or this bull market continues past the 5.25 year mark and peaks sometime shortly thereafter, most likely by year end.

The takeaway from all this is that if we look at the facts, this current bull market is getting very long in the tooth. A Google search on the historical duration of bull markets will yield various results, dependent on which time frames are sampled but since 1871, the median bull market has lasted 50 months & the average bull market about 67 months. We are now into the 61st month of this bull market that began in March 2009. I can’t say if this time “will be different” and one would be remiss to not acknowledge the relatively large range of durations of previous bull markets. One constant that holds true though is the fact that bull markets always top well before the fundamentals show a clear path of deterioration, just as bear markets always end just when it looks like things are heading from bad to worse (think early 2009).

One final point to mention is that I would put very little stock into time symmetry alone. As I said, the odds of the duration of this bear market exactly matching the last two would be pretty slim. However, the markets always have & always will work in fairly predictable cycles (with the average bear market around 14 months). By far the most important weighting that I factor into my analysis are the charts (technicals). The first sign that the current bull market may have seen it’s best days would be a solid break and weekly close below the primary uptrend line shown on this chart. A trendline break alone is only one component of a likely trend reversal. The fact that we have negative divergence in place on both the PPO & RSI as well as other momentum indicators and oscillators adds to the case for a more lasting trend change once prices break below the primary uptrend lines on the major US indices. It is those factors (and more) taken together with the aforementioned time symmetry and duration of the current bull market that raise the chances that every new high the market makes going forward will be its last (assuming that final high is not already in place).

So what does this mean? Should one close all of their long-side trades & investments and load up on long-dated index puts? Absolutely not. As compelling as some of these comparisons may seem, stocks can and often do continue to climb in spite of bearish technicals, especially in bull markets just as they continue to fall despite bullish divergences & bullish technical pattern breakouts during bear markets. The take-away from looking at the big picture, like this 20-year weekly chart of the $OEX, is to help identify when to stop buying the dips & start shorting the rips, i.e.- To try and identify, as early as possibly, when we have turned that all-important corner from bull market to bear market. It usually takes the typical trend trader chaser about a 20% drop (the common measure for a bear market) before they acknowledge that the tide has indeed turned. Staying long and worse yet, adding to long positions all the way down on a 20% drop can be devastating to one’s portfolio, wiping out months or even years of gains.

At this time, all of my long-term trend indicators remain bullish with my short-term indicators still on sell signals and the intermediate-term trend (as defined by the 20/50 ema pair) very close but not yet crossing over to a sell signal. With the markets near a potential key inflection point, my own preference is to keep things relatively light in the near-term until it becomes more clear whether this recent move down was just another longer-term buying opp on the road to new highs or just the beginning of a much larger downtrend to come. While I favor the latter, I would prefer to see both the short & intermediate-term trends on solid sell signals before returning to an aggressive short positioning. I did remove a significant amount of my long hedges Friday afternoon as although we were just shy of my preferred bounce target, I did not want to risk those profits over a three-day weekend with the extra overnight risk. That took me from a slightly net long portfolio back to a net short portfolio. Next week I will most likely to add back some more short exposure but very selectively & strategically, such as a bounce back to a very well defined support level or backtest of a recently broken bearish pattern & only on stocks that look to have quite a bit of downside left.

Have a great weekend & Happy Easter to those who celebrate it.  -Randy Phinney

*For those not familiar with the $OEX, as per wikipedia: The S&P 100, a subset of the S&P 500, includes 100 leading U.S. stocks with exchange-listed options. Constituents of the S&P 100 are selected for sector balance and represent about 57% of the market capitalization of the S&P 500 and almost 45% of the market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. In past years, turnover among stocks in the S&P 100 has been even lower than the turnover in the S&P 500.