| Is this a sucker's rally?  Dear Friend, That's the question on everyone's mind from Wall Street to Main Street.
If it is incautious investors will soon be reliving the agonies of 2008, helplessly watching their portfolios evaporate.
There are signs pointing the way for us here and today I'd like to run through them with you so you don't get caught in any bear market traps.
But first lets look at what happened in the market yesterday. Stocks gapped opened in the first hour of trade yesterday as investors become convinced an economic recovery is before us.
I have argued the bulls have to prove themselves before we can begin to take the long side of the market seriously.
The majority of our long-term indicators have now turned positive, with TWO important exceptions…
From a technical perspective here is what the bulls accomplished with yesterday's spike advance:
1) All of the major indexes have closed above their 200-day moving averages. 2) The S&P 500 broke above the January highs. This means we have a higher high on this intermediate up cycle than the previous one. In other words, a right hand translation is forming.
3) The McClellan Summation Index is trending above zero for both the NYSE and the OTC.
4) The new high/new low differential is now beginning to trend above its 10-day moving average.
This is changing the technical conditions of the market favorably, so we must be prepared to make adjustments to the long-term trend.
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June will be the deciding month
However, there are two conditions we still need to see triggered…
1) The 50-day moving average of the S&P 500 needs to get above the 200-day moving average and trend above it. We aren't there yet, although we are heading in this direction fast.
2) The price of the S&P 500 needs to close above the 10-month moving average on an end of the month basis. In our studies we have found that using a 12-month moving average over the last 15 years is actually a better at filtering out sucker rallies.
Lastly, we are well below the cyclical component of the long-term trend.
This is measured by the monthly Bollinger Band line. According to the Wave Theory of Price Action, a bear market trends below the monthly middle Bollinger Band line and bull markets above the monthly middle Bollinger Band line. As impressive as this rally has been the long-term wave is still trending in the lower half of the long-term BB line.
STAY CAUTIOUS: There is still a chance this rally will reverse …
This suggests that as long as price remains below the monthly middle Bollinger Band line we run the risk of the rally reversing at any time.
They say the stock market climbs a wall of worry and I can't think of more things we ought to be worried about than some of the very dynamics that caused the bear market in the first place.
From my perspective, this bear market was caused because … 1. A plunging dollar caused crude oil prices to soar
2. Rising prices damaged consumer's spending making it harder to afford housing.
3. This led to a housing collapse,
4. Which led to the credit and banking crisis. 5. Consequently, a recession followed.
So guess what's happening now…
The dollar has plunged since the beginning of 2009… which has caused crude oil prices to DOUBLE in prices … which is now cutting into the consumer's ability to spend and to afford housing and other items.
This will lead to an even weaker housing market, with housing prices falling more.
The government keeps issuing more and more Treasuring bonds to pay for it's fiscal stimulus package but the liquidity at the banks is still shrinking!
M2 is now contracting at a -0.5%. So lending is still hard to get because there just isn't the liquidity at banks.
This in turn FORCES more lay off's.
General Motor's is a perfect example of what is yet to come
Hundreds of thousands of unemployed are about to hit the surging unemployment ranks.
I am very concerned about $70+ oil prices which looks well the way to testing long-term resistance at the $78 to $84 a barrel range. Given how weak the economy is I find it hard to comprehend how the economy can produce a robust recovery with oil cutting this deeply into the consumer and corporate earnings again.
It is hard to comprehend a recovery is right around the corner under these circumstances but the market seems convinced things are going to get better fast.
So what is the plan?
My recommendations are these.
FIRST, wait until we have confirmation that the 50-day moving average can trend above the 200-day moving average for the S&P 500.
IMPORTANT: This would have kept you out of ALL the bear market traps in 2000-2002 as seen in the above chart.
SECOND, we also need to see price trend above and hold above the S&P 500's 10 month moving average on a closing month basis.
It would be even better if we use a 12 month moving average, given how deep this recession really is.
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