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Short-Term Bull, Long-Term Bear

01/19/2009 12:00 pm EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

Larry McMillan, editor of The Option Strategist, says the market looks good in the short run, but the lows will be retested.

The new year started out in bullish fashion, with the Standard & Poor’s 500 index (SPX) breaking out over the 920 resistance area. As long as SPX remains above the upward trending line, the chart is bullish. The chart would only turn bearish if the support at 850-860 were violated. (It closed above 850 Friday—Editor.)

Equity-only put-call ratios have continued to remain on Buy signals since they were first issued about a month ago. During that time, the ratios have declined steadily, and now they are nearing the lower regions of their charts. While that by itself is not significant, it is noteworthy that sell signals in the recent past arose from levels not much lower than today’s. We prefer not to anticipate such a change in signal, however, and so the bottom line is that as long as these ratios continue to decline, that is bullish for the market.

Perhaps the most startling area is breadth. There have been five separate days on which there have been more than 2,000 advancing issues. This tremendous expansion of breadth pushed both the breadth oscillators to all-time highs! We have often said that it is necessary for breadth to expand into overbought conditions at the beginning of a new bullish market phase. That condition has certainly been satisfied.

In summary, we continue to view this market as bullish. Progress is, at times, difficult, but with the indicators generally bullish, we expect higher prices over the short term.

But before you decide that the bear market has ended, here's some sobering data: In 1929, the market bottomed in November, and then rallied 50% into the next April (1930). The rally accelerated greatly after New Year's 1930.

I [recently] visited the library to read the New York Times from those days. After the first crash day (October 24, 1929), the headlines read: "Wall Street optimistic; brokers call break 'technical;' selling is overdone; dividend-paying stocks are worth more; " How familiar does THAT sound?

By April 1930, speculation was rampant in stocks again, and margin account debit balances were ballooning. Takeovers were occurring with frequency, and there wasn't even that much discussion of the economy. Some of the biggest stocks—AT&T and US Steel, in particular—regained nearly all of the ground that was previously lost. AT&T traded at new highs.

One very interesting article in April declared that trading had returned to “normal.” That is a term that we hear today, as traders are looking for more “normalcy” in this market before declaring that the bottom is in.

So, if the market continues to rally now, as we expect, prepare to be bombarded with optimism galore. [But] I'm certain that we have not seen the bottom of this bear market yet—the November lows will eventually be retested.

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