In the last issue of the BullBear Market Report, I presented detailed analysis showing that global risk asset markets are already 16 months into a bear market that started in the February-May 2011 time frame. I turned long term bearish on stocks and commodities On June 1, 2011 and turned intermediate term bullish on stocks at the October 2011 bottom. At that time I presented analysis supporting the thesis that US markets could very well make new highs, but that it would be an Elliott Wave "B Wave" high setting up a Major C Wave decline. In April 2012 I turned bearish again and called for the beginning of the main body of the bear market. We did get a decline through May and then a rally in June. A review of the technical market picture at this juncture still supports the conclusion that we are somewhere in a C wave decline and that the recent rally was a corrective move within that context.
New readers should note that my larger scale analysis is that US equities (and possibly global stocks as well) are in the midst of the final stage of a long term bear market that began in 2000. That bear market has taken the shape of a five wave ABCDE triangle formation and in my view the final leg of the E wave is in progress now. Further scrutiny of the overall conditions of this market reveals the possibility that the anticipated final low will come at a level substantially higher than the 2009 low and perhaps even higher than the 2011 bottom. We may see an end to this bear market that bears significant resemblance to the 1982 low that put an end to the 1966-1982 bear market. There also remains an outlier possibility for a 2008-like panic to lows beyond the March 2009 bottom. In either case, the right side of the market remains the bear side and it's not critical at this time that we know with certainty which outcome will prevail. As the current move unfolds, we will be able to evaluate the technicals to determine the appropriate time to cover shorts and turn around for the ensuing bull market.
While there does seem to be some chance that US markets could rally back to the April high for yet another B wave top, this possibility appears diminished at this time. The panic short covering rally related to the European Summit news appears to have exhausted buying power and reset many indicators from bearish overextended conditions. Shorts entered at these levels stand a fairly good chance of playing out well and there are rather clear, nearby price and technical conditions which will alert the trader that a run back at the highs is in progress. There does seem to be nearly total complacency on the part of the vast majority of market participants with a strong tendency towards an expectation that somehow, someway US equities will continue to levitate. The underlying technicals, as I have been detailing since February, say otherwise. The current technical setup bears striking, alarming resemblance to that which prevailed at the July 2011 highs and there are also some comparisons to the early stages of the 2007-2009 bear market. Having said that, there is some possibility that bears will be rather disappointed with the downside results on this leg, particularly if they are shorting US markets. While continuing to analyze SPX as a key guide to global market movements, it might be best to seek short side exposure in non-US equity markets in order to make the greatest gains during this next (and potentially final) bear wave.
Since the 2011 top, there has been a marked disconnect between US and non-US equity markets. SPX is down about .7% since the May 2011 top while the World Stock Index ETF (VT) has fallen 13%, Asia 50 ETF (AIA) has dropped 17%, Global Stock Index Ex-US (GWL) declined 22%, BRIC (BIK) is down 27% and EuroStoxx 50 (FEZ) has been crushed by 38.5%:
Either US markets are about to play catch up with the rest of the world as the American economy slips into a double dip recession and US companies see earrings suffer badly and unexpectedly, or the market is signaling that, quite unexpectedly, the US will lead the world out of the next downturn and will benefit disproportionally from capital inflows. There's very little in the technicals that supports the conclusion that the bear market is ending here. It's also important to note that 0% performance in 14 months is still a bear market.
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