Mapping Out the Bear Tracks
This column was originally published on RealMoney on April 3 at 7:25 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
I believe the U.S. economy will slip into a recession over the next two years and that U.S. stocks have entered a bear market. My main reason for these predictions is stress in the banking system caused by the weak housing and real estate markets.
While fundamentals are clearly deteriorating, the technicals on the major equity averages are showing some negative divergences. However, they're not yet weak enough to confirm the bear market based on pure technical analysis.
Complacency vs. Wishful ThinkingThe major equity averages turned in mixed performances for the first quarter, but only the Dow industrials and the semiconductors ended the quarter lower. During the quarter, several indices, such as the Dow Jones Industrial Average, the S&P 500, the Nasdaq, the Dow Jones Transportation Average and the Dow Jones Utilities Average, set new all-time highs. However, the increased volatility, which we've seen since I made my bear market call on Feb. 20, is typical of a market setting a multiyear high amid numerous bear tracks. In February, the bulls became complacent but stayed the course even after the Dow plunged 416 points on Feb. 27. The volatility since then is normal, say the bulls, but in my judgment that's just wishful thinking. Let's take a look at the averages.
|Market||Current Price||% Gain or Loss||2006 Close||2007 First Half High||Percent Off High||2007 First Half Low|
|Dow Jones Industrial Average
|Click here for larger image.|
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