In my Shemitah video , I talked about current market patterns and how they are sounding a warning. Further, the longer that we stay in these patterns, the tougher it will be to get out of them. These patterns have resulted in large bear market declines. The question concerning the current stock market is whether we are in a correction (where we end back in the bull market) or we have started a new bear market cycle like 2007 – 2009.
I like to look at long-term indicators for clues as to where we are right now. There is one long-term indicator that started to turn negative back in November 2014. Typically this indicator turns negative way before the market does. It has been a reliable indicator in the past. Since it is a long-term indicator, it takes a while to develop and once it starts falling (indicating the market is falling) it takes a while to turn it around. Also, once it starts falling over a long period of time, it is signaling that the market has a ways to go down signaling a bear market could be upon us.
That indicator has really started falling and is exhibiting the characteristics of a bear market. Grant it, it is still early. However, it is a huge warning sign. Let’s take a look at the MACD. It isn’t as important to understand the mechanics as much as it is to understand what it is saying about the direction of the market.
The stock market is at the top of the chart and the MACD is larger and at the bottom. You can see what it looked like at the beginning of the 2000 and 2007 bear markets. The MACD stopped going up and reversed direction going down.
Now take a look at today – it is the steep curve and shape of the indicator that is concerning. If you look at the chart of the stock market, you can see how it responded when the MACD started going down two previous times. In 2000 the MACD turning down proceeded a -50% loss and in 2007 the MACD turning down proceeded a -57% loss.
So what is the take away?
Are we seeing a correction or the start of a bear market? The MACD would suggest the latter. However, it is too early to declare the bull market dead. I am waiting for one other indicator to confirm the change in direction. Next week I will write about that one.
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