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Posted on 27 October 2012 | 2,098 views

Stock Market Sentiment and Technical Analysis Mirrors the Worst Bear Market of 1973

In January 1973, a financial magazine published the stock market outlooks of a select group of professional investors. All agreed: Market prices are headed higher. Yet in that very month, the stock market started a slide. It later became the Worst Bear Market Since the Great Depression” — from January 11, 1973 to December 6, 1974 the Dow Industrials lost 45% in value.

As of October 25, 2012 the S&P 500 is up 12% year-to-date and the NASDAQ 100 is up 16.6% year-to-date. Check out the monthly chart of the S&P 500 and NASDAQ 100, showing the stock market over the last decade — two bear markets and two bull markets.

Bloomberg reported this week that the five big banks it surveyed all are calling for a record new high in the S&P next year. Goldman Sachs (Stock Symbol: GS) is calling for the S&P to hit 1575, the bank of Montreal is calling for the same number, 1600 is where the Bank of America (Stock Symbol: BAC) thinks the S&P is going; not to be outdone, Citigroup (Stock Symbol: C) is calling for 1615 on the S&P and Oppenheimer is looking for 1585. So, the big boys are all calling for new all-time highs.

This situation is very reminiscent of the Barron’s headline of January 1973 “Not a Bear Among Them” — that was a summary of opinion from the magazine’s annual forum, and the group Bloomberg just surveyed is pretty much a proxy for that one.

PATTERNS REPEAT IN THE STOCK MARKET — Technical analysis, or the study of charts, teaches that history and patterns repeat. A look at the current bull run shows it is nearing resistance points (the March 2000 peak and the October 2007 peak) in the S&P 500. Those old highs (and end of those bull markets) are what technical traders call “resistance” or a price area that could be difficult to move above.

LISTEN TO THE WARNING SIGNALS — Technical traders also rely on many different types of indicators that can offer “red flag” warning signals regarding trends or the end of trends. The Relative Strength Index (RSI) indicator, which is a widely used momentum tool is a simple concept. A rising tool confirms rising prices and vice versa.

Where this indicator comes in handy is when it “diverges” or fails to confirm a push to new price highs. This simply means the RSI did not make new momentum reading highs, while price did, hence the divergence. Technical traders call that a “bearish divergence” and that actually occurred ahead of the March 2000 high, and ahead of the October 2007 high.

THE BULL MARKET IS TIRED — Guess what? Just look at the charts, it’s happening again right now. What could this mean? This bull market is tired, running of out gas, running out of steam. All the good news is priced in. The current bull market has been running higher since March 2009 — it’s approaching the highs, which have capped market action over the last 10 years.

Given the current chart signals, this could be a good time to consider banking some of those profits and raising cash levels, at least temporarily. After all, it’s always a good feeling when you see your retirement account at a bigger level than last year.

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One Comment »

  • Jessica Johnson said:


    RT @pdxpixels: Stock Market Sentiment and Technical Analysis Mirrors the Worst Bear Market of 1973 #StockMarketCrash http://t.co/yHUAIs2K

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