Cyclical Bull Market Pattern

Trader Talk

The short term momentum oscillators remain positive, confirming the bullish stance of the AlphaKing Trading indicator. The accumulation/distribution profile remains positive, with zero distribution days since the new buy was issued earlier in the week. The leadership profile also remains negative - and a real worry - with Friday's close yielding 141 stocks making new 52 week highs versus 167 stocks making new 52 week lows.

The 4% rule remains positive, confirmed with bullish Federal Reserve policy. The VXO volatility indicator closed the week at 21.5, moving back into the complacency camp. The primary Elliott wave count continues to suggest a wave 2 counter-trend advance within a bear market continues to unfold. If so, the wave 3 melt-down run should start once the near double top, or actual double topping pattern completes. A move above the October 2007 highs negates this bearish view, and would confirm a new cyclical bull market underway.

Traditional seasonal trends have us looking for a difficult third quarter for the bulls after a modest summer rally attempt stalls, while the Presidential cycle remains bullish for the remainder of 2008. The Benner-Fibonacci cycle will remain bullish until 2010, though this prolonged time period may include one or more cyclical bear phases. The AlphaKing combination cycle sees a bear market slump running all the way into mid-December when the next major turn-date is slated to land.

Summary:

The stock market advance this week confirms the Elliott Wave 2 counter trend topping move is not yet complete. A move to, and possibly above, the 200 day moving averages for the S&P00 and Dow Industrials (charts below) is very possible. As is the bear case being completely wrong. Since our indicators have turned bullish, and we will remain hopeful longs while-ever that trend remains in play - and really hopeful longs if the internal momentum picks up going forward - we thought this a good time to go over the normal cyclical bull pattern, so we can track current market trends with what should be happening based on history.

Cyclical bull markets follow every cyclical bear markets. We've had - or are still in - a cyclical bear market that started last October. Bears usually last 6 to 12 months, with average drops near the 20-30% loss range for the stock indexes. Thus both time and depth of losses do open the door to the bear having run its course here. As does the FED super-stimulus, and capitulation washout going into the July 15th low. No guarantee, though they are encouraging signs for the bull case.

The economy going into bear market lows is generally horrible, and expected to get worse. Late bears and early bulls are especially painful to cyclical stocks, such as home builders, industrial firms, and commodity related sectors, such as precious metals and energy. The normal pattern is for those sectors to continue to fall as the stock indexes recover from their bear lows. That initial rally of the new cyclical bull market is usually led by non-cyclically sensitive growth stocks - those stocks with sales and earnings not directly effected by the economy - such as pharmaceutical and biotech stocks, consumer staples, and select tech stocks. Small cap growth stocks - which get beaten down senseless during the bear market - are often the cheapest and fastest growing companies and thus often provide the greatest gains going into the early phases of new bull runs.

New bull markets act like they have been bitten by the Energizer Bunny, and keep going and going and going, despite seemingly horrible news landing all over the place. This climbing the wall of worry continues as the new leadership stocks start to go parabolic and the indexes really start to hum as it becomes obvious to all the economy is improving and a new bull underway. Then we hit a tough corrective phase as super bullish investor sentiment gets washed out. This opens the door to the second phase of the new bull, with investors surprised to find lagging cyclical type stocks - industrials, precious metals, energy - beating the prior superstar biotech, pharma, tech and consumer staple growth stocks on the second leg up. And then the economy and financial markets get too hot as the second stage of the bull also goes near parabolic, forcing the FED to raise interest rates to smack some sense into traders, investors, and speculators, and the whole cycle starts over again as the new bear is born out of peaking bubbles all over the place (with the economy zooming along, and expected to zoom along forever and forever - smack before a surprise recession lands due to higher interest rates.)

One thing to note about the above normal cycle, is the effect of bubbles and imploding bubbles, which seem to have a life of their own outside of normal trends, and can often distort gains and losses seen as each sector - cyclical and non-cyclically sensitive - go through the ups and downs of their normalized cycle. For instance, energy and precious metals usually peak along with the stock indexes going into bull tops, and thus the recent move for oil from the 70 of last fall to its 147 peak just a few weeks ago was a surprise as far as the normal cycle was concerned. Just as the home builders should have gotten crushed going into the 2000-2002 bear slowdown, yet flipped into super-bubble mode as consumers gobbled up super-cheap FED interest rates to buy their dream McMansion. Demographic trends also played a part of that surprise housing bubble despite the 2001 recession. Just as the construction build up prior to the Chinese Olympics played its part in extending the energy and commodity bubbles this time around.

So while the normal pattern does have great influence in stock market trends, so too does the presence of bubbles and imploding bubbles, which can have an agenda away from normalized expectations. So here we are with commodities falling hard now the China commodity bubble appears to have popped - thus in-line with expecations as the economy weakens - while health care, technology, small cap, and consumer staple growth stocks start to outperform - thus in-line with expecatations as their earnings are not connected to the overall economy. This first phase should last 12-18 months, with cyclical stocks lagging in extended bear phases during that time.

If the usual pattern of new cyclical bull markets is currently in play, then we can expect an acceleration of upside momentum, with an ever-expanding list of stocks making new highs, with volume on rallies much higher than we experience on corrective dips. The stock indexes should also move to new highs over time. If we're still in a bear market, then none of the above bullish chips will fall into place, and our trend-following indicators will trigger a sell signal as downside momentum starts to pick up steam. So far the bulls are hanging in there, but no one is smoking any cigars as yet.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com

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