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IS THE BULL MARKET OVER?
IS THE BULL MARKET OVER?
by Mark Gordon
Founder - GoldenTicker.com
August 30, 2007
According to William J. O'Neil in his landmark best-seller "How To Make Money In Stocks," the really big money is made in the first one or two years of a bull market. He also states that the rest of the "up" cycle is mostly a series of back and forth movements in the market averages. This is then followed by a bear market. So what stage are we in?
If you look at a historical chart of the Nasdaq (click on the above chart to enlarge) you can see that a major advance started in late 2002. The market ran from 1108 in October 2002 to a high of 2154 in January 2004, for a huge 94% gain. This was the first stage of the bull market where the really big money was made.
The first corrective leg (1) began as the market corrected almost 19% in eight months down to a low of 1751 in August of 2004. During this same period the S&P 500 only corrected 8.4%. A bear market is typically defined as a prolonged downturn of more than 15% on all major indexes ( Dow, S&P 500, and Nasdaq). This was just a normal corrective pullback during a bull market.
The Nasdaq then took off and rallied up to 2186 by December 2004, only to correct again (2). This time the index came down 14% to a low of 1890.
The third leg down (3) started in April of 2006 after reaching a high of 2376 and correcting into July to 2013, putting in a 15% correction. Again, the S&P 500 only corrected 8% qualifying this as a normal pullback.
We now appear to be putting in our fourth corrective leg (4) with the Nasdaq reaching a high of 2725 last month (July-07) and putting in a low of 2387 so far in August. This represents a 12.4% correction that we may still be in the middle of.
Since the end of the first or "money making" phase of the this bull run in January 2004, the Nasdaq has only moved up 19%. That is only about 5% per year on an annualized basis. This is the back and forth action that Mr. O'Neil described.
According to O'Neil, markets enter a "bear" phase after the markets have run up for a year or two then put in several "corrective" adjustments like the ones noted above. He then states that heavy upside volume without further price progress may signal an upcoming bear market. If you look at the volume on the Nasdaq (5) in late July and early August you will see just that.
Since the stock market is a forward thinking mechanism we usually enter a bear market while the economy is still strong and before it goes into a recession. If you wait for the economy to confirm weakess, you will be too late. Since growth stocks typically correct 1.5 to 2.5 times the general market, you must exit weak markets quickly and stay out untill we begin a new bull market.
We have had our big initial run-up and several corrective phases. We have now seen big volume without much upside progress. This odds now seem to be in favor of a bear market. Please note that nothing is certain in the stock market and the Fed can manipulate markets with adjustments in interest rates. Let the "tape" tell you what's really happening.
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