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Get Ready for Another

By Jeff Clark
Tuesday, May 6, 2008

You could almost hear the champagne corks popping...
 
After declining for five consecutive months, the S&P 500 clawed its way to a 4.7% gain in April. Yeah! Yippee! Hoo-rah!
 
But the celebrating may be a bit premature. As you can see from the following chart, all the market has done is rally back up to its 20-month exponential moving average (EMA)...
 
 
 
The 20-month EMA is the proverbial line in the sand between bull and bear markets. If the S&P 500 is trading above the line, then the bull is in charge and we should see higher stock prices over time. On the other hand, if the S&P drops below the line, then the bear takes over and investors should tread cautiously.
 
Back on April 1, the last time I showed you this chart, the S&P 500 was at 1,320. Tired from the water torture of five down months, investors had given up all hope. And the bear was clearly out of the cave.
 
But stock prices had declined so far so fast that a bounce back up to the exponential moving average line was inevitable. We saw an example of that type of bounce when the previous bear market took over back in late 2000. And we saw it again last month.
 
The question now, of course, is... where do we go from here?
 
There's enough momentum behind stock prices and enough skepticism among the analyst community (which is a good contrary indicator) to send stock prices even higher over the short term. Most of the technical indicators I follow aren't yet stretched far enough to the upside to cause much concern. So my guess is we'll see the S&P 500 power higher – maybe as high as 1,425 to 1,430 – over the next week or two.
 
Ultimately, though, the market is headed lower. Perhaps much lower.
 
Breaking below the 20-month EMA is an ominous development. A bear attack doesn't end after just one swipe of the claw. And I suspect a second swipe is coming soon.
 
If the S&P 500 follows the pattern of the previous bear market, then the next leg down could be quite painful. It probably makes sense to use the strength of the last month, and any strength we see over the next couple of weeks, to lighten up on long positions... and maybe add a few short sales.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1223.12 -0.1% +10.6%
Oil 38.22 -0.2% -0.3%
Gold 139.11 +0.8% +22.3%
Silver 29.51 +3.2% +62.6%
US-Dollar 79.17 -1.3% +4.3%
Euro 1.33 -0.8% -10.4%
Volatility 18.02 +0.1% -15.2%
Gold Stocks 590.99 +1.6% +25.5%
10-Year Yield 2.94 -2.7% -15.5%

World ETFs
Symbol Price
Change
52-Wk
USA 122.76 -0.1% +10.6%
Canada 30.56 +0.2% +18.0%
Russia 21.98 +0.2% +17.2%
India 37.92 +0.2% +19.4%
Israel 16.76 +0.4% +10.4%
Japan 10.69 +0.5% +7.0%
Singapore 13.71 -0.2% +18.1%
Taiwan 14.92 +1.0% +20.2%
S. Korea 57.19 -0.2% +21.5%
S. Africa 72.26 +0.5% +29.7%
China 43.84 -1.3% -3.3%
Lat.America 53.21 +0.1% +9.2%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.74 +0.1% +20.2%
Big Pharma 63.99 -0.2% -3.2%
Internet 72.58 +0.7% +25.0%
Semis 16.18 -0.3% +26.4%
Utilities 31.19 -0.3% +1.8%
Defense 18.47 -0.3% +8.9%
Nanotech 10.08 +0.5% +1.3%
Alt. Energy 10.24 +1.6% -2.0%
Water 18.62 +0.7% +13.8%
Insurance 16.08 -0.4% +19.0%
Biotech 20.56 +0.1% +26.6%
Retail 19.59 -0.6% +26.6%
Software 24.65 -0.6% +22.7%
Big Tech 53.85 0.0% +22.1%
Construction 13.20 +0.8% +14.8%
Media 13.73 +0.7% +24.7%
Consumer Svcs 67.38 0.0% +23.4%
Financials 55.01 -0.1% +5.7%
Health Care 63.90 -0.6% +1.2%
Industrials 63.51 -0.1% +19.3%
Basic Mat 74.64 +0.4% +27.8%
Real Estate 55.35 +0.1% +21.8%
Transportation 91.39 -0.4% +23.9%
Telecom 22.65 +0.3% +16.8%