This post appeared earlier today on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.
Any readers of this column who have children know that kids need a firm set of rules that create structure in their lives. Some of this structure comes from the parents themselves, some from teachers in school, and still more comes from friends' homes and society itself. A youngster without structure in their life is likely doomed to fail at much of what they do.
(This, by the way, is not my personal observation. It is a sociologically accepted principle proved by countless studies done on children worldwide. Moreover, the findings just don't apply to children. Find me an adult with no structure, and you will likely find a very lost soul who is struggling to survive in virtually every facet of his life.)
Markets also need structure in order to grow, be healthy and thrive. And when that structure breaks down, the market takes on the same sense of a lost soul -- struggling to survive in virtually every facet of its "life."
Most technicians have been educated in a variety of indicators and studies to determine a security's or index's trend. Their basic bag of goodies includes trend lines, moving averages, Elliott wave counts, Fibonacci numbers, relative strength index, moving average convergence/divergence, stochastics, Bollinger Bands, and the like. Anyone even remotely technically inclined has been exposed to a host of these in her readings on technical analysis.
If you followed my research when I was chief technical strategist at Morgan Stanley, you know I use a little-known Far Eastern model that I learned many years ago to determine market structure. (Most technicians have very little knowledge of this model, and what reference material exists is very elementary.) I have used this methodology as my single most important indicator for more than 10 years and have made many countertrend, news-breaking market calls using it (including the precise bottom to the entire bear market pre-open on the morning of Oct. 10, 2002). It, more than any other model, shows me the lay of the land most clearly, and I have found to be more accurate than any other model out there.
What that model is showing now about the long-term bull structure of U.S. equities is unfortunately not a growing, healthy, thriving market. Let me be clear: I am
referring to the bull market that started in October 2002/March 2003 that went through the fall of 2007. What I am talking about is the long-term bull market that has been in place since the summer of
You might question me how can I say that there has been a bull market that lasted 25 years, when the decline from 2000 to 2003 took the
down about 50% and the
nearly 80%. Everyone knows that a bear market is defined by a move of 20% or more down from a prior peak. Surely we had that 20% down move, qualifying these selloffs as true bear markets. Well, the proof is in the interpretation of the charts that define structure, not the textbooks written by academics who tell us what a bull or bear market is "supposed" to be.
Case in point: The chart below shows the S&P 500 on a monthly basis -- each single vertical bar represents an entire month's range. Pieces of my aforementioned favorite model are overlaid, creating a zone between the green and red lines (known to practitioners as the "cloud") along with a component that takes current price and lags it 25 bars (royal blue line) in time.
Here's what's immensely important to note from this chart: The selloff that bottomed in October 2002, although it broke the cloud zone, had the lagging line hold the bottom of the cloud zone. It thus held, though barely, its long-term bull structure. However, this has
happened in the current selloff; a close this month on Friday beneath SPX 1023 has that lagging line clearly beneath its cloud.
Monthly S&P 500 Cash Index
The proper conclusion, therefore -- and I don't like being the bearer of bad news, but I'd rather tell you how I see it than leave you thinking that all will be OK in the market -- is that barring a rather significant rally that brings the SPX back above 1023 by this Friday's close, it is now fair to say that the long-term bull structure of the market has been broken for the first time in 25 years. Therefore, sadly, I believe that one needs to become a seller on subsequent rallies for years to come.
So, you might ask, when this benchmark index rallies over the next six months, where might those levels be to get out of those longs you wished you had sold months ago? I believe you need to look at this same model on a weekly basis, taking one step forward in time. It shows the current weekly cloud with a range of 1366 to 1416.
Weekly S&P 500 Cash Index
I don't believe that will help us much this week, given a close Friday of 877. But as time goes on, heading out as much as six months, we can see that by late April 2009, the cloud's value drops to about 1100 to 1200. Should time and price line up, the index will likely have trouble hurdling that zone, and thus investors should consider unloading a decent amount of equity.
Lastly, using the same model on a mega-long-term quarterly chart basis, a close on Dec. 31 of this year under SPX 923 suggest that the best-case scenario for all of 2009 is a move back up to 1116 (on a closing quarterly basis) and even a tad
for all of 2010.
Rick Bensignor is president and chief strategist at Bensignor Strategies, a technical trading advisory firm that provides macro and micro technical and behavioral perspective across all asset classes, including on-the-fly analysis in real time. He was previously chief market strategist at Morgan Stanley Principal Strategies, responsible for providing the firm's proprietary traders with strategic investment and tactical trading ideas.