Thursday, October 27, 2011

Comparison of Bear Market Rallies

The bear market rallies lasting a month or more in the last 2 bear markets are listed below:

14.2% in 140 days
10.2% in 41 days
21.7% in 60 days
24.6% in 108 days
24.4% in 29 days

14.5% in 63 days
27.5% in 46 days

Currently we are up 19% in 24 days which is in the target zone for percent advance in price, but still short on time of what has been typical. So IF this is a bear market rally, which I think it probably is, it is likely to cool down soon, but may put in a higher high in the next few weeks.

Also, today the S&P 500 is bumping up into the 200 day moving average from the underside as well as the neckline of the head and shoulders chart pattern that formed earlier this year between Feb-July. The 200 day SMA is where the initial bear market rally stopped in the 2007-2009 bear market. Additionally the S&P 500 is touching a multi decade support/resistance line from the underside today (connecting the 1987 high and 2002 low).

On a longer term basis there are some significant reasons other than patterns to believe that the market will have difficulty pushing substantially higher. One of the most obvious to me is that the cash levels in major mutual funds is basically hovering at an all time low. The market has historically topped out bull markets when the cash levels fell to 4% or so. And we have been in the lower 3% range for most of the last year. So, while this advance has been amazing off the Oct low, I think the firepower to fuel new bull market highs is limited.

I think that the tops in 2000, 2007, and 2011 all in within about 10-12% of each other in the S&P 500 are an indication that the cash level is too low to be able to push the market higher. Before another major secular bull market it would be sensible in historical comparisons for the cash level to rise to levels suggestive that a multi year advance is sustainable. Another longer term bearish indication from this data is that this cash deficiency is occurring at a LOWER high than the last high in 2007.