Old Bear or New Bull? Who Cares?

06/04/2009 12:00 pm EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Mary Anne and Pamela Aden, editors of The Aden Forecast, say that previous rallies from market lows like the one we just saw have been sustained and substantial.

The action in the stock market has been impressive since March. The Dow Jones Industrial Average is at a new high for this year, and the Nasdaq Composite index hit a 7½-month high. The stock market is still showing promise, and it’s headed higher.

[But] is this up move the start of a new bull market rise, or just a rebound rise within a bear market? It doesn’t matter.

The bear market decline of 2007-2009 was the second most severe stock market drop in history. The Dow lost more than half of its gains going back to 1932. In other words, it more than fulfilled the characteristics of a real bear market decline.

Ned Davis Research calls this a waterfall decline, and they believe the bear market lows have been seen. Industry leadership tends to move to more aggressive cyclical stocks during the post-waterfall period, which we’re in now.

Most interesting, Davis found that post-waterfall cyclical bull markets generally last about 1¾ years and they gained 65% on average. Since 1929, there was not one case where the market gained less than 45%, with the shortest bull rise lasting five months. The longest one was the bull market of 2002-2007.

[So], even if this current rise ends up being a rebound rise within a bear market, you can still make some decent money investing in the strongest sectors for as long as it lasts.

The Dow is currently breaking above important levels and its next upside target resistance is 9000 and 9600. It appears to be forming a bottom at the lower side of a mega-up channel that’s been in force since 1965.

Also interesting, the Dow may be establishing a pattern similar to the 1965-1982 period, [when it] experienced a series of ups and downs for 17 years, but was unable to break out to new highs above 1000. Nevertheless, the Dow’s rises from the bottoms in 1970 and 1974 were significant, with the Dow rising 67% and 76%.

In 2002, the Dow was oversold and it then rose 101%. And even though the Dow hit a new high in 2007, it wasn’t a significant high and the market then fell sharply. This year, the Dow’s leading indicator hit an extreme low, the [lowest] ever, and even though the Dow has risen about 34% since March, stocks have plenty of room to rise further, and they likely will.

So far, the Amex index has been the only US stock index to rise above one of its key moving averages, signaling it’s headed higher. Nasdaq is starting to follow.  But some of the foreign markets, like China, are breaking up, too, while Brazil and others are very close. For now, the markets are turning bullish, one by one, which is one of the best technical signs we’ve seen in quite a while. So, stay with your stock positions as long as the trend lasts.

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