It Ain't Over Till It's Over.

Since topping out in October 2007, global stock markets have been characterized by two distinct phases: a decline through January/March this year, and then a rebound until mid-May. The predominantly weak undertone of the past few weeks has naturally again raised the question of whether the strength from January/March until three weeks ago has simply been a bear market rally, or whether it in fact was a longer-term upturn in stock markets’ fortunes.

The Dow still has a date with destiny on the downside, and I went on record last year calling a primary bear trend for the U.S. (and most other developed) stock markets, and more recently described the most likely medium-term scenario as a “muddle-through” type of pattern . And this view still makes sense.

First up is a long-term chart of the S&P 500 Index together with a simple 12-month rate of change (or momentum) indicator. Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1991, 1994, 2000 to 2003, and again since December 2007.

Next up is a monthly graph of the Dow Jones Industrial Index and its MACD oscillator. The fact that it has been in negative territory since December 2007 serves as confirmation of a primary bear trend.

Primary bear trends, however, are not non-stop declining trends and are made up of secondary up and down wiggles. In order to determine where in the bear phase we find ourselves at this point in time, let’s look at a number of shorter-term indicators.

The next chart is the CBOE Volatility Index ("THE FEAR INDEX" or VIX- shown above and on the left side of the page), an indicator that moves in the opposite direction to stock prices and shows the level of complacency (lower values) or nervousness (higher values) of market participants. The present level of 21 still has a way to go before reaching the 30 plus levels of August and October 2007 and January and March this year, but may not necessarily reach those levels in this movement as various oscillators are starting to approach overbought conditions.

Although banks are looking oversold on short-term considerations, they would need a longer convalescence period in order to rebuild their balance sheets. And until this key sector shows clear signs of a reversal, I have difficulty seeing the primary bear trend turning around in a hurry. Furthermore, the market is still dangerous, and Monday and Tuesday will be 90 degrees in time from the March low... These are potent reversal dates! I am not in the “end of the world” school, but also have little reason to see a more optimistic scenario than “muddle-through” action, typified by sub-optimal returns.