The Making of a New Bull Market, Part 3
On Friday and Tuesday, we looked at what the past 7 bull markets since 1982 have looked liked as they were coming out of their bear markets.
There are 8 common themes of most new bull markets and they are:
1. There is no rational economic reason for the early rally.
2. The semi’s lead first.
3. Every bear to bull transition is accompanied by the financials. If the financials don’t rally, there is no bull market.
4. Basic materials usually lead too. If they’re not building, there is no recovery.
5. The market pounces on any good news and shrugs off (ignores) bad news.
6. The market will open weak and then close higher for the day and do this over and over again.
7. The last hour of trading is often accompanied by strong buying. This buying is usually caused by large money on the sidelines combined with panic short covering.
8. The U.S. market leads the other world markets higher. It always has and until proven otherwise, it will again this time.
Today, let’s look at numbers 5 and 6 and tomorrow we’ll look at 7 and 8 – along with adding what I consider to be the most important rule which will be rule 9.
5. The market pounces on any good news and shrugs off (ignores) bad news.
In bear markets, bad news gets pounded on. We saw that throughout 2008. But in markets that are transitioning into a bull market, the bad news is often met with the opposite reaction. The market often shrugs it off and then proceeds to rally.
Think about all the negative news throughout the last three weeks of March. High unemployment, the very high risk of bank failures (do you remember Citi at 1.02?), higher likelihood of defaults, and more. Yet, what did the market do? It staged one of its largest 3-week rallies in 7 decades. It shrugged off the bad news and the slightest bit of news that was not as bad as expected (it wasn’t good news, it was simply not as bad as expected) was met with days of massive rallies. When you see this occur over and over again, it’s a good sign that the selling at least for the time being is done and they’re looking for any reason to rally the market. Remember the proverbial phrase “if it doesn’t go down on bad news, it’s very likely going higher.”
6. The market will open weak and then close higher for the day and do this over and over again.
Sick markets open strong and end weak. Healthy markets open weak and end strong. In bear markets that are transitioning to bull markets, the markets will open poorly, often tied to negative news as mentioned above, and then reverse and end higher. The day’s close will often be higher than the days open. If you look at any of the 7 previous bear markets over the past three decades, they all did the same as they moved to a bull market. They opened weaker as they had been doing for many months and all of a sudden they started closing higher. And they did this over and over again. This frustrates the hell out of the shorts and it also panics the big money on the sideline into getting money invested as quickly as possible. When you see this happening over and over again, it’s a good sign that the bear market is getting close to an end.
These two features are very important. Tomorrow we’ll discuss numbers 7 and 8 and I’ll also add number 9, click here to read part 4. It’s the rule that has allowed the Model Portfolio in the Daily Battle Plan to be so successful over the past year and it’s main the reason why 12 out of the 13 ETF signals triggered this year in the Model Portfolio have been profitable.
To read the first half of this series, “The Making of a New Bull Market”, click here for Part 1. For part two, click here.
This is from Larry Connors’ Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.