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The Market Has Hit the Moment of Maximum IndecisionBy Jeff ClarkThursday, October 1, 2009 It's a bull market. No, wait, it's a bear market. Nope, bull... no again, bear.
Since the beginning of this remarkable seven-month rally, I've been arguing it's only a bear-market rally. Bear markets unfold in three distinct trends. And while the severity of the first downtrend was intense and more destructive than anything any of us have seen in our lifetimes, there are still two more downtrends to go.
But I was willing to concede defeat if the bulls could rally the S&P 500 decisively above 1,055 by the end of September.
You see, 1,055 is the level of the 20-month exponential moving average (EMA) for the S&P 500. For the past 25 years, I've used this 20-month EMA as the defining point for bull and bear markets. And it's never failed me.
If the S&P is trading above the blue line, then stocks are in a bull market. If the index is below the blue line, then the bear is in control.
In January 2008, the monthly chart of the S&P 500 dropped below its 20-month exponential moving average, and a bear market was born. Yesterday, the index closed 0.25% above the monthly EMA. Here's the chart...
 A monthly close of 1% or 2% above the line is enough to coax me to throw in the towel and regretfully eat the pile of crow that has been building up in front of me over the past few months. In fact, as the market rallied early yesterday morning, I was frantically looking for something that could possibly justify explaining a switch from bearish to bullish after such a prolonged period.
But a 0.25% close above the line? Heck, that's a rounding error. In fact, the first bounce during the bear market of 2001 closed ever so slightly above the line. The S&P then went on to lose more than 40% over the next 20 months.
I can't find any reason to be bullish here. Yes, I know stocks are going up. But they're not going up because the underlying fundamentals justify the move. They're going up because institutional money managers feel pressured to follow the crowd and chase performance. Otherwise, they'll have to explain their subpar gains over the past quarter.
Their buying is creating demand at the same time the bearish traders are too whipped to hit them with aggressive selling pressure.
Still, as a trader and a follower of technical analysis (with some fundamental stuff thrown in for good measure), I'd have to respect a decisive breakout above the line. But it didn't happen.
The S&P 500 closed right at the point of maximum indecision. Bears and bulls alike can make equally compelling arguments. So we have to look at the intermediate-term indicators to get a better idea of the impending trend.
The most reliable indicators I use are the Nasdaq and NYSE Summation Indexes. Both of those crossed to the downside yesterday, generating sell signals.
The old Wall Street saying, "the market will do whatever is necessary to make the most people look like morons" is coming true. Bulls can point to the monthly close of the S&P 500 above its 20-month EMA to reassert their stance. Bears can point to the obvious resistance at this level and the sell signals from the intermediate-term indicators to enforce their positions.
The market has done a bang-up job on the bears over the past few weeks. Perhaps it's finally time to take a shot at the bulls.
Best regards and good trading,
Jeff Clark
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