Stocks Could Rally 40% in the Next Four Months

There are two bets to make right now.

 

First, bet the stock market will be sharply higher between now and March 2009. Then, bet it will be lower six months later. Here's why...

 

The 2001-02 bear market has been a terrific roadmap for navigating the current stock market. Since the directions have been spot-on so far, I've got no reason to doubt future instructions. Take a look:
 

 
 

This is a long-term monthly chart of the S&P 500 plotted against its 20-month exponential moving average. As I showed you earlier this year, this chart called the bear market.

 

In the previous bear market, we had a break below the 20-month EMA followed by a bounce back to test the line. Then we had two more declines, separated by bounces, before the final and most significant decline occurred. A bounce back to test the line is a gain of almost 40% from where we closed yesterday. You just have to play that.

 

So far, we've only seen two decline phases in the current bear market. There's one more to come. But the most recent drop has been so severe, the upcoming bounce might be HUGE. If it mimics what happened back in 2002, then the S&P could rally as high as 1,150.

 

Now, I'm assuming last week's decline marked the lows of this down phase. We may get another dip down to that level – or just slightly below – in order to test the bottom. But stock prices should have a smooth road higher for the next few months.

 

Of course, this isn't the end of the bear market. There's one more down-leg to come. And you'll want to be out of the market before it happens.

 

Here's how I'm going to trade it...

 

I'm buying a little bit now – mostly financial and technology stocks since they're the most beaten up. I'll buy more aggressively if the S&P 500 comes back and tests last Friday's low or undercuts it a bit.

 

Then I'll start trimming positions when the S&P rallies up close to 1,110 or so. That will probably take a few months. By then, the cheerleaders on all the financial networks will be talking about how amazing the bargains were back in November 2008 and how we'll never see those prices again. That's your signal to start selling.

 

Unfortunately, we have to suffer through one more decline before we can call an end to this bear market.

 

Best regards and good trading,

 

Jeff Clark

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