Bull Market’s One Year Old… What To Do Now?
It’s hard to believe but the bull market rally is turning one year old.
The rally has taken the S&P 500 from 666 on March 6, 2009 to 1,122 on March 4, 2010. That’s a 68% gain in a single year!
But a 68% rally’s only good depending on your point of view.
You might not think too much of it if you had your retirement account fully invested in the stock market through the market crash in 2008. You’re still down big if you rode the market all the way through.
Remember, the S&P 500 peaked in October 2007 at 1,576. That means you’re down 28% over the last two and a half years. Ouch, that hurts.
Market volatility like this is exactly why I advocate active trading. The only way to get ahead these days is to play the trends. In other words, buy and hold is dead.
Right now the bull market’s one year old, up 68% from the bottom, and down 28% from its peak. How can we measure the strength of the rally? Sounds like it’s time for some technical analysis!
Fibonacci Retracements are the tool I use to measure the strength of the rally. They calculate how much the rally has recouped of the previous decline.
You can see the market’s retraced 50% of its losses from the peak in October 2007 to the bottom in March 2009.
Here’s where it gets interesting.
Now obviously this isn’t the first time the stock market’s crashed and recovered. The markets go through cycles, as well as periods of bull and bear markets. It’s just the nature of the game.
The reason technical analysis works is these trends, cycles, and periods tend to play out in predictable patterns. If we’re going to play this trend, we need to know what’s happened in the past.
I went back to the chart of the S&P 500 during the last similar cycle (1999-2004). I’ve got to admit, the similarities are stunning. And it doesn’t bode well for the stock market over the next six months.
The previous stock market boom was in the late 90s. It got the nickname the dot-com boom.
In March of 2000, the S&P 500 peaked. Then the dot-com bubble burst. The stock market entered a three year bear market, finally bottoming out in March of 2003.
After hitting bottom, the S&P 500 went on a one year rally. And it retraced 50% of the losses from the previous decline.
It’s déjà vu…
Right now the similarities are eye opening. You can see in 2004 the 50% retracement put a lid on the market for almost six months.
So I wouldn’t be surprised to see the markets enter a period of choppy sideways trading.
As the bull market turns one year old, take time to look at the big picture. Look at the way things have played out in the past. There’s no way to know exactly how it will play out this time around. But history is often a good indicator of the future.
Category: Technical Analysis
