Market Update: Reliable Long-Term Indicator Suggests the Bear Market is Back

Of note, we're finally starting to see a little bit of the panic that I've suggested needs to develop before the market can generate a tradable bounce.

I found the next point sad, but interesting (warning: rant alert!):  During the weekend, I couldn't help but notice a fair number of media bulls whining for the Fed to "step up" and intervene in the market -- so it would seem that, deep down, many bulls realize that their only hope for the market to continue higher is Fed intervention.  When a market is driven solely by Fed money supply (printing), and not by a fundamentally sound economic backdrop, that's a market bubble.  Why are people begging for the Fed to keep inflating a bubble?  Have we learned nothing from the housing bubble -- not to mention the last stock bubble?  These things never end well.

And what happened to the concept of free markets? Have we Americans strayed so far that we now actually beg the government to intervene and further curtail our freedoms? Try to think five steps down the road here, media-bull interventionists. This stuff is bigger and more important than your portfolio. If you’re that worried about it, you should quit begging Uncle Sam to bail you out and sell the thing.  Stocks carry risk -- it's not the government's job to backstop you… because, in reality, you are asking all Americans to backstop you, using the government as our proxy.

I personally have no interest in backstopping anyone's portfolio but my own, and I'm willing to bet that most readers feel the same way.

Let's have a show of hands: how many readers want to continue being taxed silently through inflation caused by QE programs -- and want to keep paying higher and higher prices to put gas in your cars and food on your tables -- so that you can back some media personality’s portfolio?  Yes, you sir, in the back... hey, aren’t you a mainstream analyst?

And in the meantime, the Fed is punishing savers by continuing to drive interest rates to zero.  To some degree, Americans are forced to carry high risk portfolios in a stock market bubble because the Fed has made safer investments worthless.  So, I suppose in that sense, I can understand the begging for continued intervention.  The logic goes something like this:  "Please Mr. Bernanke, you've forced me to carry this high-risk portfolio to try and earn some return on my savings... I know its value is inflated, but can you please keep it inflated?"

But we are creating our own demons here; one thing leads to the other.

Is there more to it than that?  Sure there is -- but I'm ranting about monetary policy at the moment, not trying to consider every side of the argument.  As I see it, it's a no-win scenario at this point, and it seems like a system-wide reset may be the only solution.  Left to its natural course, I think the free market would reset.

It seems we have two opposing forces at work in the market now: 

1.  The laws of nature, which seem to consistently demonstrate that bubbles return to their starting point; versus
2.  The specter of ongoing Fed (or other central bank) intervention.

Everything in the charts suggests that the laws of nature will win in the end.  The question is: have we reached the end (will the Fed let the free market be free again?) or will the Fed pull another rabbit out of Bernanke's beard?  (Trust me: there's rabbits in there, and who knows what else.)  And further, can another QE-type program even continue to keep the market elevated in the face of ongoing deflationary forces?

So, my official stance here, just so there's no equivocation:  barring further Fed (or other large central bank) intervention, this market will ultimately return to the 2009 lows.  I believe it will eventually do so no matter what -- the question is if they will (and are able to) continue kicking the can further down the road to delay the inevitable a while longer.  Is now the time?  I don't know; I can't see that far ahead -- but the potential is definitely there.

Alright, enough ranting. 

In Friday's update, I suggested two short-term targets for the S&P 500: 1284, and 1262 beneath that. The first target was reached and breached, and it does appear likely that the second target will be reached as well.
The first chart I'd like to share is the promised long-term indicator suggesting the bear market has returned.  This chart is the NYSE Composite (NYA), which is an index that doesn't get much media coverage. I like to track it because it represents thousands of stocks, and therefore is a much more broad and accurate representation of the total stock market than, say, the Dow Jones Industrials (INDU), which only consists of 30 stocks.

This is a monthly chart, and it shows that the MACD indicator has now formed a solid bearish cross.  We can see that there are only four prior occurences of this cross during the past decade, and each one led to a prolonged bull or bear run (depending on the direction of the cross).  The current pattern is similar to the double-cross formed near the 2000 top. 

Also of note: The triangle formed by the upper blue line and lower dashed black channel line projects potential disaster if realized.

The next chart shows the Volatility Index (VIX), also known as the "Fear Index," which usually moves in the opposite direction to the market.  We can see that VIX usually needs to trade into the 30's before there's enough panic to generate a meaningful bounce.  Sometimes it needs to trade much higher. 

New readers may ask:  why is panic necessary for a bounce?  Well, it goes back to the simple concept of supply and demand, which is what drives stock prices.  The basic idea here is that if there's no panic, then the majority of longs haven't sold yet.  And if the longs haven't sold yet, then there's a lot of sellers still waiting in the wings -- and those sellers represent supply.  That pending supply of stock needs to be worked through in order to clear the way for the equation to tilt the other way again (for demand to outstrip supply), and thus for prices to bounce higher.  So, some level of panic is usually needed to clear out the sellers who are still hanging on for dear life (those who don't read my column!), which drives prices lower and thus also makes equities more attractive to new buyers.

Long-time readers will recall that in late April and early May, I noted that VIX had formed a base and should be headed into the high 20's to low 30's at the minimum.  It's getting into that projected price zone now -- but do keep in mind that my projection was the minimum expectation. 

Here's the long-term VIX chart, which shows that we still haven't reached any of the zones commonly associated with a more significant bounce.  And yes, I do think that there's probably a "Zone 2" for Global Financial Crisis levels... and I'm not looking forward to the day the market reaches that level of panic.  2008 was terrifying for everyone who was paying attention -- even for those of us who were bearish at the time. 

Just because I'm bearish doesn't mean I have to like the situation we're in -- I'm merely acknowledging and recognizing it.  Unfortunately, I do believe it probably needs to happen to purge all the fiscal and monetary mistakes we've made -- in much the way a surgeon needs to remove a cancer to keep it from spreading.  It's unpleasant and painful, but ultimately necessary for healing to occur.

Moving on to the intermediate targets, the next chart of the SPX has so far performed admirably since I first published it in early May.  The expectation for further downwards price movement remains.  I have noted a couple more bearish potentials, and we'll simply need to see how the market responds to some key levels going forward.

Next, the short-term SPX chart, which continues to reach each downward target and has now captured well over 100 SPX points of profit.  The preferred short-term target of 1260-1265 remains unchanged from last week.

Finally, I do want to publish one bullish alternate count, which I feel is lower probability, but worth mentioning at this juncture.  The Russell 2000 (RUT) currently has the appearance of a bullish falling wedge. In Elliott Wave terms, a pattern like this is termed as a "diagonal."  This pattern is one of two things -- one very bearish, and one bullish.  At this point, it's not possible to sort them out conclusively -- the best I can do is try to assimilate everything else I'm seeing and therefore conclude that the bullish outcome is the lower probability. 

In any case, I'm going to publish the chart, in order to give readers some idea of things to watch for -- so they can figure out in real-time if the lower-probability bullish outcome is occuring.  The chart notes some clues to watch, and is only annotated with the bullish potential -- I feel we've covered the bearish preferred count in depth elsewhere.  Again, I would stress:  this is an alternate count, and only provided for reader education and warning.

In conclusion: in early May I went out on a limb and suggested that an intermediate trend change was in the early stages.  The evidence continues to pile up for that case, and it now appears that nothing short of central bank intervention will prevent this decline from turning into a protracted bear market.  I think the bulls are running on fumes here, and if they can't turn this market up very soon, the technical damage will probably be too great to overcome.  Trade safe.