A concept I often discuss is how the primary trend of a market influences stock prices. If the primary trend is bearish, we should expect prices to cascade lower. When indices around the globe crashed to synchronized lows in November 2007, this served as confirmation that the primary trend was bearish.
As the rally from these lows has faded, some indices have broken to new lows (i.e., CAC 40 and Dow Transports) while others have refused to confirm these lows. Despite the terrible economic data and lack of clarity about how companies will navigate uncharted economic waters, the Nasdaq and Wilshire 5000 remain moe than 12% above the November lows and the S&P 500 is 10% above its November low.
While the possibility of a major selloff driving these markets lower remains, the large spread some indices enjoy between current stock prices and prior lows raises the possibility of a bullish non-confirmation. If the strong indices can remain above the November lows and rally to a price that surpasses the January peak, the trend will begin turning bullish.At this point, I believe there is an excellent chance such bullish action will occur. If I am correct in assuming that markets will head higher over the coming week and turn the primary trend bullish, the recession could end within six to nine months. As the recession ends and global growth begins accelerating, we should see inflation return and hard assets outperform. Such an expectation is the basis of this week's technical trade in my newsletter EPIC Insights.