Thursday, July 26, 2007

Bullish Theory While Currently Bearish

Looking back about as far as IBD shows, only once did the market not follow through to the downside over the next week after such a big drop. Only the February romp was followed by an up week. That's the bad news.

But if this is just a continuation of the August 15, 2006 rally (this just theory, relax, but I believe it's possible, and we'll only prove it in hindsight) then this could just be another quick deep violent correction in the march higher. In the 2003 rally, the market experienced 8 pullbacks/corrections of 5% or more over anywhere from 2 - 5 weeks with the longest coming in the beginning and middle of the move. The deepest was 7.6% right in the middle of the move. The move came obviously after the 2000 - 2002 Bear Market, but the correction that preceded the move was 17.6% after the October 2002 Rally. The current rally that started on August 15, 2006 was preceded by a 15.3% correction. Both periods experienced extremely negative news; Iraq, al-quaeda, jobless recovery, high unemployment, coming out of a crash, deficits, etc...; this time; high oil prices, inflation, credit crunch, interest rates, terrorism, Iraq, Iran, al-quaeda, etc... You get the point. 1991 was another similar year of all out bad news and lasted about 1 1/2 years into 1992. 1995 - 1996 years the market moved for 1 1/2 years after the 1994 Bear. Which was preceded by the same type of up and down no progress market of 1992, 1993, & 1994 after the 1991 Rally, like we saw in 2004, 2005, 2006 rallies after the 2003 Rally.

So if the average length of a rally after a major correction/bear is about 1 1/2 years and my theory is true, then we are only in the middle of the move with the best to come. So the leaders that survive this current pullback/correction should be the big winners of this Macro Bull Market. We could continue to rally through the 1st quarter of next year with a few more pullback/corrections to go. But some stocks and sectors have topped (which is great for bear market short sellers, as it will take at least 5 months to setup the shorts), and the new and some former leading sectors are setting up and in a holding period for the next leg up. This would also work into my China Olympics Topping Theory, where the Chinese will slowdown and pound their chest more once they don't need to impress the world and keep it happy, right after the Olympics or World Expo.

We'll see, it would be great if I'm right, otherwise back to the drawing board.

I accept comments.


Right now you should definitely be out of any stock that you are down on or barely made any money on. You can hang onto stocks that you have a cushion on only if they have superb fundamentals and great technical action (i.e. barely correcting considering the big down days and showed good volume on the run up with most new highs coming on higher volume). And don't forget to analyze your past trades and keep an eye on the market, you never know when we could turn higher, it only takes 4 days(I stole this one, IBD).

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