Bear cycle in full swing
Kevin Haggerty is a full-time professional trader who was
head of trading for Fidelity Capital Markets for seven years. Would you like
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The market is a captive of
the current Middle East crisis as crude oil hits new highs. This is a
double whammy to consumers, who are drowning under increased costs and debt
service in every area as these costs become a much bigger percentage of
disposable income, on top of the declining housing market. Demand has slowed
considerably, and this is reflected by the shift to a bear market posture by the
Generals. They have overweighted their portfolios with the sectors that
generally outperform during a bear cycle, which are: consumer staples,
utilities, healthcare, and in the latter part of the cycle it will be
financials. ‘Outperform’ only means they lose less than other sectors, but the
Generals have to be invested–but you don’t. The Street will spin earnings but
they won’t tell you that about 50% of all previous bear markets occurred on
rising earnings due to other factors, such as valuations and inflation.
The QQQQ and SMH made continued new bear cycle lows last week before the Middle
East erupted. The $COMPX made new lows the past two days, closing at 2037.35 on
Friday. The 5 RSI for both the QQQQ and $COMPX are <20, while the SPX/$INDU are
23.13/18.65. In addition, the 4 MA VR is 30 and breadth -823, so the market is
back to the ST-OS zone. However, the volume ratio can and often does improve as
the market trades lower for a few days, especially with the current Middle East
crisis. The SPX/$INDU mid-June lows of 1219.29/10,699 are magnets that will soon
get taken out and probably today for the Dow if the rockets continue to fly.Â
After he SPX takes out the 1219.29 magnet, it will probably work its way down to
the the 1205 -1195 zone. The next probable levels for the Dow are 10,575
-10,500, then 10,400 – 10,300. These levels are only of value for short term
traders where they might expect any upside reflex. I expect this bear cycle to
reach at least 1050 for the SPX some time in Q4 2006 to Q1 2007. Daytraders
should stick with the index proxies, energy and gold stocks while this crisis
continues to escalate.
Have a good trading day,
Kevin Haggerty
