Despite Rally, Bears Remain in Control

03/04/2008 12:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of the Chartist, says market averages need to get through certain key milestones before we can declare the end of the current bear market.

One of the main factors helping the stock market rally sharply off of its January 23rd intraday lows has been the Federal Reserve's willingness to aggressively cut interest rates. The next Federal Open Market Committee meeting is scheduled for mid-March and the odds are quite high that interest rates will be cut again.

Lower interest rates do not always guarantee higher stock prices (as seen in the last bear market), but lower rates should eventually help the economy and provide a boost to the stock market, [although] it does not mean that it will happen overnight. While no one can predict how long this current down cycle will last, we feel that it will end much sooner than many expect.

The most recent numbers from Investors Intelligence, the folks who track over 100 advisory services, [recently showed] 36.7% in the bullish camp. This represented the lowest percentage of bulls in 20 months and the second lowest reading in over five years. In addition to this, the American Association of Individual Investors [in January] saw the number of bears surging to 59%, which was a multiyear high, while the bullish contingent dropped to 20%, the lowest reading in 32 months.

This type of negative sentiment should set the stage for further gains, at least over the near term. However, the market must deal with overhead resistance. The [major indexes] are well under their respective 200-day moving averages, which have leveled off and are now heading south.

Most of the indexes continue to exhibit bearish "staircase chart" patterns of descending tops and bottoms, which have been in effect for over four months. A bearish staircase pattern in essence is a series of failing rallies.

It would be highly constructive for the Standard & Poor's 500 index to move above its previous intraday peak at 1,396. The previous peak for the Dow Jones Industrial Average was at 12,767, the NASDAQ Composite index was at 2,419, and the Russell 2000 [small-cap index was] at 731. There is a good chance that these areas, which represent short-term overhead resistance, will be taken out in the not-too-distant future.

While there is room to run on the upside, we are far from convinced that the worst is over. It is our feeling that a test of the January 23rd intraday lows similar to the final stages of the last bear market is in the cards. Whether the coming test will be successful as it was back in 2003 remains to be seen, but we are getting way ahead of ourselves.

If the market can extend its current gains and take out the previous mentioned overhead resistance, we could be dealing with a rally with the capabilities of lasting many weeks. But looking further out, and until we see more evidence to the contrary, our indicators are telling us that in no uncertain terms a bear market is in effect.

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