Wednesday, February 17, 2010


Today I'm going to forward a theory of where I think we may be headed based in part on what happened under similar fundamental conditions in Japan during the `90's.

I've been saying since November we should expect a profit taking event of around 10% that would ultimately separate the second leg of this cyclical bull from a potential third.

While the recent correction didn't quite reach the 10% level I was looking for, I think at -9.2% it was close enough considering the trillions of dollars the Fed has thrown at the markets.

Under similar conditions in `04 with Greenspan madly pumping liquidity the market only managed an 8.8% correction.

So all in all I think we probably now have our corrective move in place. I'm not ruling out a test of the recent low before heading higher, but I will point out that there is so much liquidity sloshing around the world that neither the March bottom nor the July intermediate low was tested. So I don't think I would bet heavily on a retest of the 1044 bottom.

Typically the largest gains in bull markets come at the beginning and end of the bull. Which makes sense as smart money will recognize and jump into the move early as they know that's when the largest percentage gains occur the fastest.

At the end of the bull we finally reach a state of complacency that  retail investors finally becomes convinced that good times are here to stay. This is the period where smart money unloads to frantic retail buying.

I think we may be approaching an interesting point in this cyclical bull. First off let me show you what happened to the Nikkei during similar fundamental conditions in the `90's.

Notice how every cyclical bull had at least 3 legs. Also notice how every cyclical bull exploded higher in about 1 year before rolling over again as the secular bear fundamentals eventually pulled the Nikkei back down.

I doubt anyone could look at a 10 year chart of the S&P and not come to the conclusion that we are and have been in a secular bear market since 2000. That means this is probably just another cyclical bull within the context of a secular bear market.

So just like the Nikkei this bull is going to come to an end as the bearish fundamentals will eventually overbalance all the Fed's liquidity just like they did repeatedly in Japan.

What I'm wondering is if this cyclical bull will, like the Nikkei, compress the rest of the bull move into a final third leg.


The 1450 target is just a guess, but if the market surges higher we could see the third leg match the point gains of the first leg before finally rolling over into the third phase of the secular bear market.

Either way, if the Nikkei is any indication, we should have at least one more leg up before this bull expires.