From the August 01, 2009 issue of Futures Magazine • Subscribe!

Riding the bear

WHEN CYCLES SHIFT

The confirmed reversal point of the larger market always creates a new cycle. It is best to identify the point where that cycle changes. However, that is not always possible because cycles are measured in months, not days or hours.

First, consider the conclusion of a bull cycle. A bull market’s resolution is not always the result of some cataclysmic occurrence, a concept promulgated by mass media coverage. The factors that lead to a bear market are excessive speculating and unrestrained leverage. Ultimately, this becomes apparent to even the most unsophisticated market participant. When it does, the bull dies.

Phrases such as “things are different now” or “if you would have put $10,000 in this market at the beginning and never sold, you’d be a multi-millionaire today” are common during the last stages of a bull market. Of course, how long that stage will last varies. Bull cycles are also marked by themes. Consider the tech bubble, the nifty fifty bubble, the conglomerate boom, the Internet bubble and, of course, the housing bubble. Such themes are a case of herd driven by greed. Traders must see these phenomena for what they are and not get caught up in the proclamations.

During the latter stages of a bull market, the public will view the start of the upcoming decline as a buying opportunity. The profits they achieved during the bull run will reinforce this belief. In the meantime, as prices continue to creep ever lower, the experienced traders and institutions sell into every rally.

The end of bull markets are periods of erratic volume and extreme vacillation. These conditions are signs to be cautious. Be wary any time prices act irrationally and indicators such as oscillators won’t behave in an orderly and conventional manner. A safe market is a fairly even balance of offsetting trades. An erratic market is a warning sign it is about to implode.

Starting with the year 1900, the length of the average bull cycle has been 40 months and three weeks, or about three and a half years long. This is probably close enough for market timing and hand grenades. During a bull market, approximately 90% of all stocks follow the 100-day moving average higher.

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