Bull Markets on Trial

07/07/2009 2:52 pm EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden of The Aden Forecast see positive signals strong enough to endure the upcoming correction.

The stock market continues to show positive signs. The international stock markets are pointing upward as well. And unless we see reliable evidence to the con­trary, the stock markets are telling us that the recession is going to end soon.

If that proves to be the case, the market will get the official green light. It’ll then begin to gain mo­mentum on its own and not based on speculation and opinions, as is currently the case.

For now, the controversy con­tinues but once again, there were more straws in the wind this month signaling better times ahead. The Coppock index, for instance, issued a stock market buy signal and it has a very reliable 90-year track record. [The Coppock index is a technical indicator derived from the rate of market decline over the preceding 11 and 14 months—Editor.]

Based on the historical record, the strongest sectors that tend to outperform six months after a recession ends are commodity-based stocks, such as energy, met­als, resources, and materials like steel producers. This makes sense because it would coincide with stronger global economic growth, demand out of China and an ongo­ing rise in commodities.

Remember, when the recession ends it won’t be obvious until a few months later. Unemployment lags so it’ll still be high. That’s because it takes a while for companies to start seeing profits, increasing confidence to start hiring workers again. But there will be other signs and we’ll be keeping an eye out for them. So what would change our minds?

… The stock market as a whole is now temporarily overbought following its best quarter in 10 years. This means that it’s risen too far for now and is poised for a downward correction before it resumes its rise.

This downward correction will be very important. If the stock indices correct normally, say form­ing a bigger bottom, then that’ll be fine. But if the indices were to break below their March lows it would be extremely bearish and a strong signal that the recession has further to run. So this upcoming downward correction will be the deciding factor and true test as to how this contro­versy evolves in the weeks ahead.

Meanwhile, more of the individual stock indices have risen above their key moving averages. Last month it was only AMEX but [in the last ] month, Nas­daq, the Dow Utilities, and the S&P 500 all followed, and that’s bullish technical action.

If they can now stay above these levels during any upcoming down­ward corrections, it’ll be a very bull­ish sign. Mexico has broken above its average too and so have some of the other international markets.

The leading indicators for all of the US and world stock markets keep telling us that a major bottom occurred in March and stocks are going higher (see Hong Kong as one example out of doz­ens). Note that its indicator is rising from an extremely oversold area. This does not happen often but when it does, it precedes a healthy rise and that’s what we think it’s signaling again.

In fact, the stock market’s behavior from 2000 to the present [is similar] to the 1966-75 time pe­riod, which ended with a very sharp stock drop in 1973-74. The 2007-08 stock drop was nearly identical and so was the action preceding it. It’s strange but true and the behavior continues to this day, coinciding with the action in 1975 when the Dow rose 76%.

Coincidence? Maybe, but even if it is don’t forget that based on the last 12 bull markets since 1932, the average bull market rise has lasted 57 months and gained 164%. So whatever we want to label this up­ move (bull market, secular rise, bear market rebound), it does have good profit potential, at least for the time being, unless we see a big change take place in the period ahead.

Also important is that the world’s monetary officials have gone all out to end this crisis. And if these measures don’t work, they’ll throw more fuel on the fire. There’s an old saying that goes, don’t fight the Fed. This is one of those times that this clearly seems to apply. The Fed is determined and so are the majority of the world’s central banks. They’ve shown by their ac­tions that they’ll do whatever it takes to keep things together. And so far the message is loud and clear… stay with your stock positions.

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