Classic bear market action

• July 17, 2006
• Gary Kaltbaum

Gary Kaltbaum is an investment advisor
with over 18 years experience, and a Fox News Channel Business Contributor. Gary
is the author of

The Investors Edge. Mr. Kaltbaum is
also the host of the nationally syndicated radio show “Investors Edge” on over
50 radio stations. Gary is also editor and publisher of “Gary Kaltbaum’s
Trendwatch”…a weekly and monthly technical analysis research report for the
institutional investor. If you would like a free trial to Gary’s Daily Market
Alerts

click here. 888-484-8220 ext. 1. 

Before we get into the
technicals, we cant help but go over some things that we said over
several months ago…that are now coming to fruition. Ignore at your own risk.
Over 10 months ago, we stated that all our studies of cycles told us that the
move in HOUSING was done. We can’t begin to tell you how much argument we got
from just that one thought. Based on that  thought, we went on to state that we
did not think the economy, which had been sizzling, would sizzle forever. Our
other worry besides the consumer using their house like an ATM was a FED that
does not know how to stop raising rates. Since, not only has HOUSING topped, but
the FED continues to tighten the screws.  Fast forward to the recent past. We
went on to state that the next problem facing this market was not just our FED
but  ALL the policy makers around the globe were taking away the most overblown
stimulus in the history of time…and that this had to have an effect on markets
and economies around the world. 

 

Ladies and gentlemen, numbers do not lie. Here is the Leading Economic Index,
which is put together by the Conference Board. The “LEI” has now contracted for
the past 6 months. Why is this important? Simple! Every time this has occurred,
the economy has slowed down markedly. The Conference Board states that since the
Korean War, 9 times we had an outright recession and the other 4 times had
strong economic slowdowns. The chart speaks for itself.

    

The yield curve has been screaming slowdown/recession. Of course, most pundits
say not to worry even though an inverted yield curve has had a great record of
forecasting them. The Conference Board also states that there have been 7 times
when the yield curve has inverted and the LEI also contracted for six months.
The last 6 of those times have seen a recession an average of 9.3 months later. 
Since we are big believers in the characteristics of occurrences, we take these
characteristics seriously. More importantly, the market is now forecasting these
occurrences. Remember, the market will act in advance of any potential problems.

 

That leads us into the markets. We need to repeat our thoughts about last week’s
action….and we think it is an important lesson about markets and news. There
should be no doubt that the market was helped along this week by the news out of
the Middle East…no doubt at all.  BUT…and listen carefully…if this market
was starting a new bull….let’s say 3 weeks ago…the market would have gone
down for a bit and then turned back up. We think it is important you learn
lessons from the past. When London was bombed, markets went down for a few
hours…and then rifled back up. Why? We were still in a bull move. When we were
hit by 9/11, markets fell in unison for days in the emotion of the tragedy…and
then turned back up with a monster rally. Why? Because the market had already
gone way down and was due to turn up. This bear market did not start this past
week. For the major indices, it started on May 11…and as we have suggested all
the way down, we believe we are just in the early innings. Bear markets do
occur!  We are always amazed at how so many refuse to realize that bear markets
are a normal course of business in the markets. Bear markets do not last weeks.
Garden variety bear markets last months…or longer. Please keep this all in
mind. It is very important.

 

The only reason we wanted to show you charts today is because it was classic
bear market action that major indices failed right at their now-declining moving
averages. We repeat…this is classic bear market action. It is in the study of
these characteristics that has kept us ahead of the game. Have they worked 100%
of the time? We could only wish. But they have worked the majority of the time
and that’s why we follow them…to put odds in our favor. Look how the Dow, S&P,
NASDAQ, NDX, RUSSELL all failed at or into the declining 50 day moving averages.
Notice how the NASDAQ and NDX continue to act much worse than their
counterparts…another characteristic of a bear market we have been telling you
about.

Other evidence of longer-term problems:

 

The TRANSPORTS have now put in the double top we told you about…at around
5000. They HAD been important leaders.

      

 

RETAIL is imploding. NEW LOWS all over the pace in names like HD, LOW and
meltdowns in important names like BBY. This is not the type of action you see in
“just corrections.”

 

NEW LOWS have picked up in a big way…a huge negative making the technicals
that much worse.

 

WORLD MARKETS are going along for the ride. In recent corrections, WORLD MARKETS
did not budge.

 

We would say about 3-4 out of 10 stocks are in good technical shape. This has
always been our #1 indicator…that is how many stocks are in an uptrend vs. a
downtrend…just gross! This is the indicator that tells us we are not in “just
a correction” that you are hearing from most.

 

Most sectors are now in a major downtrend. We can count on one hand how many
sectors are in good technical shape…with most being DEFENSIVE names.

 

ADVANCE/DECLINE figures remain horrid.

 

Rallies have been sharp but fleeting. This is another characteristic of a bear
market that we taught you in the last bear cycle.

 

The “UKPI”…The Unofficial Kaltbaum Psychotic Indicator” says there are no
bases to buy off of…and nothing but shorts into the next bounce into
resistance or into declining moving averages.

 

Nothing good to say looking farther out but shorter-term could be another story.
Shorter-term, all major indices are very extended to the downside which could
lead to a violent bounce. We are not saying it will happen. We are saying
conditions are such that it could happen…especially if we get some good news
out of the Middle East. Go back and look at the previous charts. Notice how
stretched they are from their moving averages at this time. The last time the
markets were this stretched to the downside was when markets started their last 
bounce on  June 14th. The reason for the bounce was to work off the extended
condition to the downside. We may get some of that now. That said, earnings come
out in droves this week…which will definitely change the playing field for
many stocks. As well, news out of the Middle East is going to be fluid. So stay
on your toes but recognize the forest from the trees. The forest is the overall
market…BLAH! The trees are the bounces. A major downtrend is in place right
now and should be respected. We are of the belief that the markets talk. You had
better listen.

Gary Kaltbaum