Six Reasons This May Be a New Bull

04/07/2009 11:00 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, say this may be more than a bear market rally, and they’ll tell what they’re looking for in the weeks ahead.

The [recent market] rebound was the steepest in 60 years, and half of the time the market experienced 90% up days, which shows real strength. The Dow Jones Industrial Average gained 21% in less than a month and the Standard & Poor’s 500 index rose 22%.

This strongly suggests that the stock market is headed higher. If this rally evolves into a renewed bull market rise, it’ll be very positive for the economy. But if the rise poops out prematurely and the market again turns down, it would forecast a prolonged recession and more job losses.

Many have given valid reasons why they believe this rise will end up being a bear market rally. But we’re not so sure and here are some reasons why:

1. The stock market is the most oversold it’s ever been. Whenever the leading indicator has approached the major low area, the S&P was stretched too far on the downside. A significant bull market rise followed, with the Dow gaining 32% to 574%. With the exception of 1987, these rises lasted two and five years. On a technical basis, this strongly indicates that a significant bull market rise is far more likely than not.

2. In 1974, the Dow lost 45%. In the 2007-2009 bear market, the Dow plunged 53%. So, this bear has surpassed the 1974 bear in percentage losses and it’s the second worst decline of the past century. Only the collapse during the Great Depression was more severe.

3. Bear market bottoms normally occur when pessimism and gloom are rampant. After seeing the stock market fall for months on end without a break, combined with soaring unemployment, a worsening economy, the global credit crisis, plunging real estate values, [and] soaring foreclosures, we can’t remember a more gloomy overall environment.

4. Plus, we’ve recently seen some first signs that the economy and the banking situation may be starting to stabilize.

5. Most important, we know that the Federal Reserve is going all out to turn this economy around.  And while this crisis has been so much bigger than previous cases, there’s an old saying that goes: “Don’t fight the Fed.”

6. Another positive is the action in some of the emerging markets. Even though world stock markets generally move together, emerging markets have held up better than the Dow and the other markets in the more developed world.

For now, we’re watching the Dow. So far, it tested but it’s resisting near 7900. It could move up to near 10,000 as its next target. This would amount to about a 50% rebound of the Dow’s decline from its 2007 peak—fairly normal for bear market rallies, [which] tend to recoup about one-third to two-thirds of the previous drop.

This rebound still has good upside potential and if it proves to be a bear market rally, then we’ll take advantage of this opportunity to lighten up. [But] if this is the beginning of a renewed bull market rise, we’ll either stay with our positions, switch to stronger stocks, or buy some new positions.

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