Stock Market At 12-Year Lows (Yawn). What’s Next?

Today I am in no mood to dilly-dally.  Here is the chart right off the bat.  It’s a big one, so you’ll want to click on it to get a better picture.  We have all been thoroughly depressed by CNBC and Bloomberg TV telling us how awful the economy is and how the markets are at 12 year lows.  That’s not even the nightly broadcast news - which knows even less about the markets than the business networks.

Earlier in the week, the markets were in a free fall.  Today the markets were up but nobody trusts it anymore.  People do not care.  They really don’t.  They’re afraid.  They want to know that they will be able to retire.  But they do not care about the day to day market.  It doesn’t matter if the markets go up because they will just go down tomorrow.

That’s what the common man thinks about the stock market.  Ok, I really have no idea what the common man thinks.  But I have as much of an idea as I do about what I think the market will do next.

Usually, that is.

What’s next for the stock market

I think I see a set up of a head and shoulders bottom over the next several months.  Indulge me by looking at another chart-  it’s another large chart so click for the full size:

The recent low - when we eventually have the recent low because one up-day does not an up-trend make - the recent low could be the “head” of the head and shoulders bottom.  This means we will have a short term rally coming up - a fairly substantial one at that because it might go as high as 1000 on the S&P 500 (^GSPC) to create the neck-line.  We could see the 200 Day Moving Average drop to that level and act as the resistance for the rally.  After that point we could see a sell off to approximately the November low level.  And then we will break out and be happily on our way to the next great bull market.

That’s a pretty good script, right?

Well I feel comfortable telling you that it won’t happen just like that.  But, that doesn’t mean we shouldn’t look for signs of a turn around - even if it is a short term turn around.  The large chart above shows you how the VIX is not indicating a great deal of fear in the markets.  I have to be honest - I am not sure if I can trust that fully - I believe we will have a day of reckoning with volatility, but I could certainly be wrong.  The lack of volatility is bullish in my eyes.

When I wrote about MACD, I mentioned how the lows in this indicator from November were still in tact and were not being taken out in the recent sell off.  Well, two weeks later that is still the case.  This is also bullish.  I also wrote about how the Gold/Silver ratio gave a signal for the market sell off last September.  The ratio is creeping back towards the historic levels, which could be a sign that the sell off is close to over.  It certainly might not mean that, but that is my current thesis - the bear market will not end until we have a GLD/SLV ratio closer to 5.

Another indicator I wrote about was Fan Lines.  The theory is that the down turn will face three major points of resistance, and once the third fan line is broken, then we can begin a new bull trend.  Well, that second fan line that I drew is proving to be some serious resistance.  My little Head-and-Shoulders bottom fantasy could play into the Fan Line indicator.

Of course, it could continue a downward trend without remorse and take out a whole new level of lows.  We’re at 12 year lows.  What’s to keep us from going for the bakers dozen?

History gives us a clue

I’m glad that I have the Big Picture from Barry Ritholtz to read at night (and during the day too, truth be known).  He posted a story today with a nice big chart in it.  It showed the long term Dow Jones Industrial Average (^DJI) on a log scale.  The article points out exactly how rare it is to hit a 12 year low in the Dow Jones.  It has happened exactly three times in history - and this is the third.  1932 was the first and 1974 was the second time (you’ll want to click for a readable copy).

The article goes on to point out that the recession (depression) will go on after the bear market bottom.  GDP will continue to contract and unemployment will continue to rise.  But that does not mean that there will not be opportunities for stocks.

So we will continue to watch the markets to see if we get our Head & Shoulders or 3rd fan breakout or dips in the VIX (^VIX) or Gold/Silver ratio.  There will be a bottom at some point.  Do not rush to call it, but be open to see it.

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