Secular Score Leaves Sell Territory as Cyclical Uptrend Continues to Weaken

| May 15, 2010

After remaining in sell territory for several months, the Secular Trend Score (STS) moved well above the -80 level this week as stock market volatility finally eroded the complacency that had driven the speculative uptrend from early February to an extremely overbought condition.

It is important to keep in mind that the STS is a very long-term indicator, reflecting the health of the secular trend in stocks, so this sharp move from -80 up to -64 is not a bullish sign. The STS is designed to identify secular trend inflection points, telling us both when it is time to move our portfolio into growth stocks at the early stages of a secular bull market and when it is time to get out at the beginning of a secular bear. Once a confirmed secular sell signal occurs, as it did most recently in 2000, the next useful signal will be provided by the STS when it moves into buy territory. Until then, the secular bear will remain in control. The recent move back into sell territory simply reflected the extremely poor character of the current environment from a long-term investment perspective.

The cyclical uptrend from early 2009 has experienced a meaningful breakdown over the past two weeks, and the Cyclical Trend Score (CTS) is now trending lower as the rally begins to weaken.

We have been expecting the formation of a long-term top in US equities this summer, and the next several weeks should tell us if that process is already in progress. Probabilities suggest that stocks will attempt to move up toward the April highs after putting in a short-term bottom somewhere in the 1,110 to 1,130 range, and the most likely scenario that we are tracking would have the index fail to make a meaningful new high as the CTS continues to move down toward sell territory. As always, anything is possible in the financial markets, so the best that we can do is track the likely scenarios and estimate their associated probabilities. Let’s see what happens.

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Category: Commentary, Market Update

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