Global Outlook

The Final Bull Market Phase May Be Finished

Contributed by eResearch

Stock prices are cyclical. Stocks run through phases of optimism and pessimism. These phases are no secret: they have been written about by Charles H. Dow and his successors for more than a century. They repeat endlessly, over and over again. Still, the public never learns.

It is all too easy, since it is merely human nature, to get caught up in the mass mood of the moment, lose all perspective and run with the emotions of the crowd. If you do not learn how to recognize the technical indications, and if you are not disciplined, the easiest thing in the world to do is to allow yourself to be pulled along by the mass mood, the "group think". But that is the way to be wrong at the critical turning points, to buy at tops and sell at bottoms, and to consistently underperform the market. To make money and outperform the market, we need to do the opposite.

The final bull market phase may be finished. Sentiment indicators have been at record-high bullish levels for months, which is typical of a top. Volume has diminished on rallies, as uninformed speculators have shot their wads and become fully invested.

The bull market lasted more than 3.5 years, a ripe old age. The smart money knows that stock prices are cyclical, "no tree grows to the sky", and all good things must eventually come to an end. Low and falling volume trends suggests that the smart money stopped buying months ago and switched to the distribution phase, parceling out at retail prices the stocks they bought years ago at wholesale prices at the bottom.

The smart money used the Fed's announcement of unlimited QE3 on 9/13/12 to sell at the top. Since then, stocks prices have churned and eroded. Tell-tale bearish technical cracks have been appearing under the "obviously" bullish surface as the smart money liquidates stocks.

The end of the Bull Market is followed by the first Bear Market phase, which is marked by general disbelief in the face of clear and widespread technical deterioration. But, when everyone who ever is going to buy has already bought, there is only one direction for prices to go, and that is down.

When buying power is used up, there is insufficient demand to absorb the accelerating distribution of stocks by the smart money at high prices, so prices have to move lower. In this phase, an ever increasing number of stocks already have stalled out and formed potentially bearish chart patterns. But even as stocks break critical chart support levels, this clear bearish technical evidence is widely ignored by uninformed speculators. After all, the Fed is printing unlimited free money, and "buy the dips" is still the advice of the brokers and the dealers and their paid spokesmen in the media.

The uninformed majority hopes and believes that the "conventional wisdom" of all the highly-compensated Wall Street analysts, strategists and economists will be right--never mind that they always tell the "Muppets" to "Buy! Buy! Buy!", no matter what. So, stock price declines are met with general disbelief.

The next Bear Market phase is marked by a sudden mood change, from optimism and hope to shock and fear. One day, the public wakes up and sees, much to its surprise, that "the emperor has no clothes". Actual fundamental business conditions are not panning out to be as positive as previously hoped. The "new era" of unlimited monetary policy expansion does not appear to be having the desired effect. In fact, there may be a problem.

The smart money is long gone, and there is no one left to buy when the public wants out. Stock prices drop steeply in a vacuum. Fear quickly replaces greed. Repeated waves of panic may sweep the market. Transactional volume swells as the unsophisticated investor screams, "Get me out at any price!" Sharp professional traders may be willing to bid way down in price for stocks when prices drop too far too fast, but the best that can be hoped for is a dead-cat bounce that recovers only a fraction of the steep loss.

In the third and final Bear Market phase, uninformed speculators and investors throw away stocks at distress prices. After everyone who is capable of selling has sold already, the Bear Market is exhausted, and the stage is then set for the cycle to begin again.