Stocks Confirm Start of New Short-Term Cycle

Published 03/14/2012, 01:44 AM
Updated 07/09/2023, 06:31 AM
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The S&P 500 index closed sharply higher yesterday, moving up to a new high for the cyclical bull market from early 2009. Technical indicators are moderately bullish overall on the daily chart, favoring a continuation of the advance. However, the rally from October is extremely overextended on a short-term basis and it will almost certainly be followed by a violent overbought correction.
SP500
With respect to cycle analysis, the strong move higher yesterday confirms that the latest Short-Term Cycle Low (STCL) occurred on March 6 as suggested by the character of the rebound last week. Additionally, the close well above the last Beta High (BH) reconfirms the bullish translation that has persisted since October and favors additional short-term strength.
SP500

However, the advance has developed an extremely speculative character and the alpha phase rally of the new cycle has taken the form of a potential “blow-off” move, signaling that we are likely entering a period of heightened short-term volatility that will provide an important signal with respect to long-term direction.

From a big picture perspective, sentiment has reached another secular bear market extreme. After experiencing despair as the stock market bottomed in early 2009, the mainstream view is now euphoric, believing that there are substantial gains ahead for the current cyclical bull market. Unfortunately, just as the bearish sentiment extreme in early 2009 coincided with a cyclical low, the current bullish extreme is likely occurring near a cyclical high. This type of sentiment vacillation is typical during the middle stage of a secular bear market. Longtime readers will recall that, while despair gripped the majority of market participants in early 2009, we were extremely bullish as our chart analysis indicated that we were on the verge of one of the best long trading opportunities in a generation.

Make no mistake about it: being contrarian near cyclical inflection points is never easy. After all, we are emotional beings and, as such, we will always feel compelled to join the crowd, especially when short-term market behavior supports popular opinion. That is why it is so important to both remain focused on the long-term view and base your investment and trading decisions on a reliable methodology with a long, successful performance history.

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