Since the last BullBear Market Report, the US equities markets have undergone a Wave 2 correction of the first move in a new, primary, secular bull market that began in November 2012. While I continued to maintain a long term bullish orientation, the period since the May top produced a set of technical readings which strongly resembled conditions present at the 2007 and 2011 tops. I remained open to the possibility that a new cyclical bear market began in May but I continued to warn that if a new secular bull market had begun, such technical indications would not represent the same kind of top that came with similar conditions during the secular bear market from 2000-2012. Indeed, the Wave 2 correction was shallow, achieving a mere 38.2% retracement of the Wave 1 bull move. Ultimately, Wave 2 was a bullish rising triangle formation of higher highs and higher lows.
Today, the market is closing above the upper rail of the channel formed since the 2009 low. While certainly a pullback of some kind is likely following this major long term breakout, a weekly close above the channel will further solidify the technical argument for a long term secular bull market and would square with the commencement of a Wave 3 move.
In "The Death of Disasterism", I described the psychology of the market setup at the time:
As the US equities markets correct from new all time highs some preliminary takeaways have emerged from the recent pullback. The most evident lesson from this period is that bearish market psychology is far from dead. Immediately upon the April 22nd intraday reversal following Ben Bernanke's comments on QE tapering, bears emerged from their caves in droves to call the top in stocks and predict the decline and fall of western civilization. And that's not an exaggeration. There is a deeply embedded bearish psychology at work among market participants and observers which rises to the level of ideology. This corrective episode in the market story may have revealed that there are very few real bulls and that current market psychology is heavily skewed towards a range between disasterist bears and conditional bulls. Essentially, there are very few who place the market at the beginning of a valid secular bull phase, a great many who feel we are in the latter phases of a cyclical bull which started in 2009 and a large number who believe that some sort of major market disaster must be impending.
The 5 1/2 month period from the May top to the October bottom saw the death of disasterist psychology advance little bit more as the drama surrounding the US budget and debt ceiling produced nothing but a series of minor pullbacks. Disasterists of both the inflationist and deflationist camps have long predicted that a US debt default would unleash the anticipated big financial Kahuna. The markets walked right up to the edge of that default scenario, crouched briefly and leaped to the other side of the chasm.
At this time we don't know why US equities are in a bull market. Is it, as the inflationists claim, simply a function of Fed liquidity? If so, we may indeed be setting up for a grand supercycle Wave (V) top in the 2016 time frame which would correlate with the popping of the fiat liquidity/debt bubble. Or is there a future economic boom coming that has yet to show its leading edge? In this report I will show that similar conditions existed in the 1982-1984 analogue. And the result then was BOTH dynamic economic growth AND a liquidity bubble that ultimately popped, resulting in the 2000-2012 secular bear market. As so often happens, the future reality may end up manifesting as a hybrid of present day theories with few analysts looking "right" in the end.
The analysis in this report shows that longs are well positioned for an extended bull run through the end of 2013 and into 2014. Traders should be oriented towards a longer than usual hold time and investors should not be looking to exit or take profits at this time.
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