HOW WILL WE KNOW?

Question: How will we know when the bear has returned?

Well, for one, the market will break back below a yearly cycle low initiating a series of lower lows and lower highs. This year that cycle low was set in February.

But didn’t the market break that low during the recent correction?

Well yes and no! The S&P and Dow did both marginally break below the February lows. However a big part of the weakness that dragged these two indexes down was due to crumbling energy stocks as the mess in the gulf unfolded.

The rest of the market held above the February lows. Some like the transports comfortably above those levels. I tend to think if the economy was ready to fall back into recession again we would be seeing a lot more weakness in the trannies.

The banking industry has also held up quite well during the recent crisis. Surprising since it was the failing European financial sector that has been blamed for the current market swoon. If the financial sector is collapsing again how come the banks are holding above the February lows?

So we are kind of up in the air right now on whether we are indeed making lower lows.

The next thing I would need to see before I would be willing to call another leg down in the secular bear would be a Dow Theory sell signal. In order for that to happen both the industrials and the transports would need to break below a secondary low point. I think we just put in that low a few weeks ago. So if the Dow were to close back below the June 8th low of 9939 and it was confirmed by the transports closing below 4089 then I would have to say it’s time to hunker down bad times are a comin’. (They are surely coming eventually - we are just trying to get the timing right.)

Then the final straw would be for the 50 day exponential moving average to cross back below the 200 and for the 200 to turn back down.

Obviously none of these things have happened yet. Until they do it’s just too early to get beared up.