Bull Market: Investors, We Have a Problem

DOW Target Increased to 18,000 by Year End
September 19, 2014
A Historical Analysis of the Past 5 Bear Markets
October 16, 2014
Show all

In the 1995 movie, Apollo 13, the crew is running normal maintenance on the spacecraft, when there is a sudden and serious malfunction in the system.  Jim Lovell (played by Tom Hanks) states the famous line, “Houston, we have a problem”.

For well over two years there has not been any “technical” market action that has caused me concern.  However, the past 7 sessions on Wall Street have given me cause for concern and lead me to convey “investors, we have a problem”.

As you know from my last update, the ECB announced its own easing program similar to our own Federal Reserve’s quantitative easing program.  Our easing program ends this month, which alone is very bearish for stocks given our past history.  On the past two occasions when our easing program finished, the stock market corrected over 15% after completion of the program. Additionally, when the market has 6 days of the last 7 of plus or minus 100 points on the DOW, we see that volatility is back.  Volatility typically signifies a weakening market.  Being that I believe we are in a bubble driven by the easing policies, the stock market needs to have some very good days soon, or we will be in a multi-week correction.

In conclusion, at IAP we see some concerning issues with this ongoing bull market.  Early indications are that the ECB program that was announced in early September may not be enough to keep our streak going.  As of today, the US stock market has had 1091 trading days without a 10% correction.  This is the 5th longest streak in US history without such a correction.  If the DOW is unable to get back above 17,000 by mid-October, and/or if the DOW drops below 16,600, then I believe the streak is going to end; we will have a correction of at least 10%, and quite possibly 15%, through the months of October and November.   I learned in school that patience is a virtue.  The next two months will require patience.  Even if we have a 10% correction or more in the fall, I do not see enough evidence, yet, suggesting that a new bear market is here.