Has The BEAR MARKET Been Knocked Out?

Rounded Bottoms For Many Stocks and Sectors

There is increasing evidence that the sharp and short BEAR MARKET of 2018 ended on Christmas Eve.  Until recently, the rally had the hallmarks of a typical BEAR MARKET rally: excruciating volatility, illiquidity, and poor volume.   For more on the characteristics of BEAR Market rallies: “Characteristics of Bear Market Rallies”.  (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).

Also lacking has been leadership.  In yesterday’s trading, only 50 stocks made new highs on the Nasdaq and 48 on the NYSE.  One would normally see MANY TIMES MORE after gains of 16% in the Dow Jones Industrials and 18% in the Nasdaq.

But, over the course of the rally, market volatility has shrunk materially.  Leadership is starting to form.

After 6 consecutive weeks of rally, the Charts are finally turning friendly.  A growing number of key individual issues and sectors are in new BULLISH Uptrends.  A Slide Show of a Few Key Issues that have completed reversal patterns is below:

A couple of key takeaways from the charts are as follows:

  1. Each stock or index completed the nearly identical pattern:  A ROUNDED Bottom.
  2. All of these were among the WORST performers of 2018.
  3. Facebook, General Electric and IBM all gapped through their resistance, establishing new uptrends.

Rounded Bottoms patterns are fairly reliable, although not perfect.  So far, though, each stock tracing out this pattern has successfully broken positive.  Many, many issues have completed this reversal pattern and turned BULLISH for the intermediate term.

Keep in mind, however, that the indexes are EXTREMELY overbought and MORE THAN due for some additional correction.  As the charts turn more favorable, the likelihood of a sharp drop, is quite small.  Corrections, at this juncture are likely to be short and shallow.

Key Sectors Turning BULLISH

Entire KEY sectors are completing Rounded Bottom pattern as illustrated below in the Second Slide Show.

Homebuilders, Broker Dealers and Semiconductors have traced out Rounded Bottoms and are turning BULLISH.  These sectors have mostly had disappointing earnings and guided lower.  The Charts, however, are looking well ahead and appear to reflect a growing optimism about the economy and the prospect for stock prices.

That’s the BEAUTY of Charts.  They capture MONEY FLOWS which LEAD the fundamentals.

More Equities To Follow

While many stocks have already reversed their chart patterns, EVEN MORE appear to be following suit.  A SAMPLE of some of the issues that are “on deck” is provided below in our third Slide Show.  These are significant issues POISED to surge higher, adding strength and leadership to the rally.

If the issues in the Slide Show complete their patterns and break out, the move higher would have significant, large cap leadership.  Almost all these issues have reported some type of slowing revenues or earnings, but the Charts seem to suggest a much better 2019 than believed a few short weeks ago.

The probability that these stocks break out is high, especially in light of those issues which have already completed their patterns.  With the conversion of these and other larger capitalization stocks to BULLISH patterns, the fuel for a much longer rally is present.

Still Way Overvalued

While the technical picture has dramatically improved,  a CORRECTION to the Rally is WAY OVERDUE.  The Dow has been up 20 of the last 28 trading days.   Panic has turned again to Greed and Complacency.

Then, of course is the issue of value.

An excellent metric for overall value was created by Warren Buffett.  The Buffet Indicator is computed as the ratio of Total Market Capitalization to Gross Domestic Product.

The history of the Buffet Indicator through the end of 2018 is presented on the left. (https://www.advisorperspectives.com/dshort/updates/2019/01/03/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator).

The blistering rally in January would put the ratio even higher!  Using this metric, the stock market is the most overvalued in history.  Only the 2000 Dot Com bubble approached the current levels of overvaluation.

Based on the degree of overvaluation, the Buffet Indicator projects an annualized real return for the next decade of MINUS 2%.

Strategy Considerations

What is the right way to deal with an overvalued market that is technically strong?  If you’re a long term investor, it makes NO SENSE  to be loading up here.  The only way to earn a decent return when buying HIGH is to sell yet HIGHER.

Eventually, the overvaluation of the market will correct.  Nothing wrong with holding cash for the time being.

For exposure, the entire Precious Metals Sector is not only technically but fundamentally BULLISH.  The other advantage of this Sector is that it has a VERY LOW correlation to equity markets.  For more background, please see: “Gold Approaches Major Buy Zone (Chart of The Day 12)”.   (https://markonomics101.com/2019/01/26/gold-approaches-major-buy-zone-chart-of-the-day-12/).

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