Sunday, February 24, 2008

Second legs down

Today I’m going to go over second legs down in bear markets. First off let’s go over the historic stats. The average gain for final legs up in bull markets is roughly 34% if my memory serves me right. As you can see from the chart we logged in a 29% gain which was pretty close. Something else that is important and that I’ve pointed out on the chart is the nominal new high in Oct. Remember me pointing out the huge net long position in the COT’s that kept getting bigger as the market dove into the Aug. lows. With hindsight we see that the long position was justified as the market hadn’t made that nominal new high yet. Now look at the 02 low and you will see the same pattern of nominal new lows that was the springboard for this cyclical bull market. These nominal new highs and new lows are pretty typical as investors become euphoric and buy the breakout or panic and sell the breakdown. Remember me pointing out the big reduction of longs in Sept. right before the final top? Some of that smart money was sneaking out the backdoor as the top was being put in.

Now we’ve had the first leg down in the bear market. The average decline for all bear market first legs down is 20% in about 4 months. The S&P logged in a 19% loss in 3 months. Pretty close. At the moment we are in the counter trend rally that should separate the first leg from the second leg down. The average decline for second legs down is roughly 19% in about 4 months.

I'll elaborate in today's update for subcribers with some historic charts and a look at some specific sectors.