Market Analysis: The Bull’s Last Charge; the Bear Awakens

In previous research commentaries, I indicated that DOW 17,500 was important to keep the market on track for DOW 20,000.  I also indicated a few weeks back that conditions appear similar to October 2014 when the SP 500 lost 9.8%.  After the Federal Reserve made its announcement last week, the DOW rallied initially and then crashed over 2000 points in three trading days.   This crash wiped out 14 months of gains on Wall Street.   In studying trend changes of the US stock market dating back to 1896, crashes typically do not start bear markets; corrections do.   Crashes can happen within bear markets such as in 2008, but historically they do not start them.  Damage from crashes is usually regained within six months of the initial crash, with the exception of the most famous crash of 1987 when losses were recovered in two years.  Crashes happen quickly and are typically over within a week or two, especially when the market has been in an overall upward movement. Assuming it is over, the DOW has lost 15%, and the SP 500 has lost a little over 12% from their respective peaks. My internal work indicates that we may have reached a bottom of this crash on Tuesday, or we will have one more push down early next week.  Clearly, volatility is back on Wall Street, and I think it will remain for a while.

This crash/correction changes my long term view of the stock market.  Going into 2015, I felt that this market could continue up past the election of 2016 and last to 2017, which would match the second longest US bull market on record of 8 years.  I felt that the easing policies would continue to inflate prices.  So far, the ECB easing programs have done nothing for the US stock market to maintain gains.  Without any form of monetary catalyst (Fed not raising rates is not a catalyst), I now do not see this lasting until 2017.  The Bull must charge soon.

Tuesday may have been the bottom of this correction.  If not, it should end soon.  I continue to hold that the September/October rally is of high importance to keeping the uptrend/bull market alive.  It cannot be a “dead cat bounce”.  At a minimum, the DOW needs to get back above 17,500, a number that I believe is of high importance.  If the Bull’s last charge can charge fast enough to recapture 17,500, then it can proceed for a while longer and could possibly hit my long term bull market target of 20,000.  I say “last”, because I do think this will be the last run of the Bull for this current bull market that has lasted now over six years.  The only thing that could change this forecast is a catalyst (such as quantitative easing or eye catching economic data), to lead me to believe that the bull market has much further to go in time.  At this point, I highly doubt something will surface.  The next sustainable rally could last one month, or it could last twelve to eighteen months.  However, I highly doubt it will last very long without further easing.

The next twelve to eighteen months are critical for asset preservation.  I will be reaching out to clients over the next few weeks to prepare them for the next bear market in US stocks.  The bear is still in hibernation based on my internal research.  DOW 20,000 is still a possibility, but the Bull must charge now.  The bear has been awakened and can come out of his cave at any time.