The Bear Stearns Bear Market
by Carl Swenlin
March 28, 2008

In many of my recent articles I have been emphasizing that we are now in a bear market, based primarily upon the fact that the S&P 500 Index 50-EMA has crossed down through the 200-EMA. This is a simple and effective way to evaluate the long-term trend of the market. In fact, it is a method that can be applied to any price index, because technical indicators don't know anything fundamental about the price index to which they are applied. Indicators simply interpret price movement.

Stocks and/or indexes don't necessarily trend together, so it is usual to have a few stocks or sector indexes trending in a different direction than a broad market index like the S&P 500. For example, Bear Stearns (BSC) topped out -- began its own private bear market -- in January 2007 at about $159 and generated a long-term sell signal about six months later (see chart below) at about $130. The S&P 500 didn't top out until 10 months later.

When the BSC 50/200-EMA downside crossover took place, it confirmed that a bear market for BSC was in progress, and virtually the only choices were to sell the stock or hedge 100%. The only way to have been long BSC during this down trend would have been on a very short-term basis with tight stops, but that would only have applied to short-term traders. Investors should have been out of the stock. Following this simple rule would have saved investors about $120, or about 75% of the all-time high price of $159.

The next chart is an update of the S&P 500, which shows all the important relationships involved -- long-term rising trend line (resistance, should prices rally that high), and the large spread between the 50/200-EMAs (which will take a lot of work to reverse). We have had some magnificent rallies recently, and quite a few medium-term buy signals have been generated; however, I'm afraid that this is just more whipsaw. The chart helps give the rallies and buy signals the proper perspective within the longer-term down trend.

Bottom Line: Using 50/200-EMA crossovers is a simple way to manage long-term positions in stocks. This is not a technique that works 100% of the time, but it will keep you out of trouble more often than not. When you see these long-term sell signals, remember what I wrote in my last article: 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.