The stock market appears to have experienced a cathartic event as the recent decline painted out three consecutive 80% down days followed by a 90% up day on December 26th. In the Lowery Research format this behavior constitutes a reversal in trend from down to up. And, two violent rally days have contributed to the signs that at least a short term bottom has formed. The first big up day went for 1086 Dow points and the one on Friday for 746 Dow points.
Investors will notice that TATY, a supply and demand indicator, has recovered to the red zone surrounding the 140 level, and the Premium/Discount indicator is also trying to recover from deep discounts represented by the minus eight level. What we need to see at this point is a continuing positive divergence in the indicators to the price, which may experience episodes of testing the recent bottom. As long as TATY continues to grow stronger by painting out higher highs and higher lows, then we shall want to remain invested and allow the positive divergence, like gravity, to pull the price higher. Hopefully this process will take long enough to qualify our purchases from last February-March for long term gains tax treatment. The odds at the moment would seem to favor such an outcome.
The bottom line is perhaps the entire bear market decline has run its course, and the resumption of the bull trend has begun. On the contrary, if TATY and other indicators begin to weaken as the price falls short of new all-time highs, then maximum defense will need to be employed to protect client wealth from what is likely a much larger and complex bear market. Given the behavior of the market during the recent weakness, then I am quite suspicious that the larger and complex bear market is the most probable. So, TATY and other indicators must continue to generate strength, or defensive action will be required to protect client wealth. Obviously, the market’s behavior during the first quarter will be critical to the actions required vis-a-vis risk and portfolio management.