How to Know When to Turn Bullish

How to Know When to Turn Bullish
By Jeff Clark
June 02, 2009

The pub was filled with smiling faces yesterday.

Stocks rallied to a new three-month high and the local financial folks, in their white shirts and power ties, took off early to celebrate. It was standing room only, and Stacy, my waitress, bragged the tips were the best she'd seen in many months.

The televisions behind the bar, which normally broadcast baseball or basketball, were tuned to CNBC. "It's a new bull market," said one of the talking heads. "The S&P 500 is now trading above the 200-day moving average. Investors need to get in now or risk missing the ride."

The bar crowd cheered.

I was quiet.

You see, it has been a nice rally... but it's not a new bull market.

The 200-day moving average (DMA) is often seen as an important support or resistance line. Breaking above or below the line can lead to an extended short-term move for a stock. But it doesn't define broad-based bull and bear markets.

As longtime Growth Stock Wire readers know, that job belongs to the 20-month exponential moving average (EMA)...

This is a monthly chart of the S&P 500 along with the 20-month EMA. You've seen this chart many times before – most recently back in late February, when I argued we were about to see a huge rally.

When the S&P 500 is trading below the 20-month EMA, then stocks are in a bear market. If the S&P 500 is above the line, then the bull is in charge. As you can see from the chart, stocks are still well below the 20-month EMA. So we are still in bear-market territory.

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In fact, the S&P 500 can rally another 100 points or so from here, and it still won't be a bull market. So the financial folks in my local pub are a bit premature in cheering the end of the bear.

The really interesting thing, though, is this: The people who are now drinking to celebrate the birth of a new bull market were drinking for an entirely different reason three months ago.

Somehow, I suspect they'll be drinking again by September.

Best regards and good trading,

Jeff Clark

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	Last	Change	52-Wk
S&P 500	942.87	+2.58%	-32.67%
Oil (USO)	37.43	+2.83%	-63.68%
Gold (GLD)	95.73	-0.49%	+9.47%
Silver (SLV)	15.35	-0.78%	-7.93%
U.S. Dollar	87.95	+0.16%	+19.30%
Euro	1.43	+0.80%	-8.18%
VIX	30.04	+3.87%	+68.48%
HUI	387.89	+0.00%	-8.04%
10-Year Yield	3.72%	0	-0.31

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