Get A Long-Term Perspective
by Carl Swenlin
March 14, 2008

One of the reasons that Decision Point has spent so much time and money to create dozens of long-term historical chart series is that we must often compare current price and indicator behavior to prior periods where market action has been similar. For example, we are currently in a bear market, so, if we describe indicators as being oversold enough to hint that THE bottom is nearly in place, we need to look at prior bear markets to verify that assertion.

Currently, many analysts are claiming that deeply oversold long-term indicators are solid evidence that the bear market is nearly over. A good example is the chart of the Percent Buy Index (PBI) below. Clearly the PBI has reached its lowest level in three years, and the PMO (Price Momentum Oscillator) is also deeply oversold. Often a three-year history would be sufficient to make historical comparisons, but in this case it is woefully inadequate.

The next chart shows an eight-year history of the same indicators, encompassing the progress of the last bear market. Note that during that bear market the PBI first reached current levels at about the half-way point in the decline, and it reached the same or lower levels three more times before the bear market was finally over. Also, while the current PMO is very oversold compared to other low readings during the recent bull market, it has only gone half the distance to the lows set in 2001 and 2002.

Bottom Line: Oversold conditions in a bear market can mean that the trouble is far from being over. In fact, when the PBI reached current levels in September 2001, it was 18 months before the new bull market began. It is a virtual certainty that the current bear market will not play out the same way as the last one did, but comparing today's market action to past bear markets gives us a genuine long-term perspective, and allows us to put today's market activity in the proper context. Don't be short-sighted when performing your chart research.

Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend.

We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.