June 15th, 2015
by Erik McCurdy, Prometheus Market Insight
The secular bear market in stocks that began in 2000 has now been in progress for 15 years. Our Secular Trend Score (STS), which analyzes a large basket of fundamental, internal, technical and sentiment data, issued a long-term sell signal in December 1999. At the time, our computer models predicted that stocks would enter a secular bear market that would last from 10 to 20 years.
Although the S&P 500 index has moved up to new all-time highs as a result of targeted manipulation by the Federal Reserve, the secular downtrend remains several years away from its terminal phase as indicated by the fact that the STS remains deep in negative territory.
The cyclical bull market from 2009 is long overdue for termination and, given the historic nature of the current bubble in the stock market, the forthcoming cyclical bear market will be violent and severe, likely resulting in losses of 40% to 60% by the time the next cyclical low forms. Our Cyclical Trend Score (CTS), which identifies highly likely cyclical trend inflection points, is trending lower in negative territory, and a move into sell territory below the -65 level during the next few weeks would indicate the potential development of a cyclical trend sell signal.
Market behavior suggests that the bubble is weakening and becoming susceptible to a meaningful breakdown. For example, market internals such as breadth and volume continue to negatively diverging from price behavior, with that divergence accelerating during the past two months.
These breakdowns in market internals tell us that distribution is taking place and that market participants are becoming more risk averse, suggesting that uptrend momentum is diminishing. As always, it is important to remember that a long-term top is a process, not an event. Our intermediate-term computer model indicates that the next test of cyclical bull market health will likely occur sometime during the next four to six weeks, so it will be important to continue monitoring market behavior closely.
Author's note: We will identify the key developments as they occur in our daily market forecasts and signal notifications available to paid subscribers. To read the full version of this commentary, login and then upgrade to a paid subscription.