Commentary for July 20, 2007

| July 20, 2007

The stock market has been in a secular bear market since the peak in the year 2000. However, very few mainstream analysts recognize that fact. The consensus view is that the cyclical downtrend from 2000 to 2002 was merely a correction in an ongoing bull market from the early 1980s and that stocks are poised to break out to meaningful new highs. Unfortunately, the mainstream view is missing the big picture, as it often does. Let’s take a look at the monthly chart of the S&P 500 index.

The high in 2000 was a confirmed secular trend inflection point, meaning the powerful bull market from the early 1980s ended and a new secular bear market began. Secular bear markets are characterized by volatile cyclical swings up and down, and we have thus far experienced two such moves, one downtrend and one uptrend. The current cyclical bull market is now nearly five years old and will likely terminate sometime during the next 12 months, after which we will experience another downtrend similar to the correction from 2000 to 2002. As always, it is impossible to predict with any useful certainty when a long-term trend such as this one will reverse, but there has been a development during the past year that suggests the turn may develop very soon.

Take another look at the monthly chart above. Notice the long-term uptrend support line that extends from early 2004 to today. From 2004 until the middle of 2006, stocks slowly worked their way higher at a measured pace as dictated by the uptrend line. However, in 2006 the uptrend accelerated into a power uptrend that continues today. The move from 2006 is very likely a speculative blow-off rally that will ultimately result in the termination of the cyclical bull market. When stocks break below the power uptrend support line on the chart above, currently near 1,470 on the S&P 500, that will be the initial sign of weakness that suggests the inevitable reversal has begun. If you are a swing trader who has taken part in the cyclical move from 2002, that breakdown will be your first signal to start considering taking profits. Of course, from an investment perspective, we remain fully defensive, as we will throughout the remainder of the secular bear market.

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Category: Commentary, Market Update

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