Adens: Is it Still a Bear?
03/30/2016 9:00 am EST
The stock market is holding firm and lower interest rates could keep this rally going, but for now the current upmove is still a rebound rise within the bear market, cautions Mary Anne and Pamela Aden, editors of The Aden Forecast.
Interestingly, in both 1929 and 1987, stocks first dropped about 14%. They then rose between 4.5% - 9.5% and then a collapse followed.
The Dow formed an uptrend since 2009. This ended up becoming part of a giant wedge formation going back to 2000. Last year the Dow broke below its uptrend and wedge, which were very bearish signs.
Technically, this suggests the Dow could decline to near the bottom side of its mega up-channel, like it did in 2009, which would be around 12,000 as a soft downside target.
If so, that would be a decline of about 34% for the bear market. And interestingly, based on the past 40 bear markets, average bear market declines have been about 30%.
As we’ve often mentioned, the stock market is a leading indicator. It often leads the economy and housing. For example, stocks fell sharply in 1970, 1974, 2001 and 2007.
These drops all preceded and/or coincided with economic recessions. On the flip side, the huge bull market rise in the 1990s moved in tandem with the tech boom and good economic growth.
And with economic growth struggling worldwide, it would not be surprising if a recession does end up evolving this year.
Yes, the stock market has been rebounding in a ‘contra-trend’ rise. But a bear market remains in force and once this rebound rise is over, stocks will likely fall a lot further.
As long as this is the case, stocks will again head lower. The exception is the Dow Jones Industrials. If it continues holding above 17400, it’ll be looking good and it could be leading the way for the others.
If so, the market would turn bullish and we’d then buy into the strongest sectors. Meanwhile, stay on the sidelines.
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