A Counter-Trend Rally? Knowing Your Risks

Chris Ciovacco at CiovaccoCapital has shown the similarity of S&P 500 charts in year 2008 and 2016.^[1,2] Based on his findings, we may have entered a bear market and the two-day rally since Wed. (01/20/2016) could be a counter-trend rally unless proved otherwise—note that a counter-trend rally most often fails before retracing 62%.

Bull Market in 2009

Using multiple Moving Averages with different duration in different colors, Crhis has shown what S&P 500 chart looks like in 2009. When blue band is at the bottom, good things happen as shown below:

Bear Market in 2008

In contrast, when the blue band is on the top, bad things happen as shown in 2008.

S&P 500 Now

Looking at S&P chart on 01/22/2016, it also has the blue band went up to the top.

Counter-Trend Rally

Counter-trend moves are a normal part of all trends (including bear markets). Chris said that the current rise of SPY looks similar to the first counter-trend rally in a series of counter-trend rallies during the 2001-2002 period.  See Also the similar view Richard Shaw in [9].

Going a step further, Chris shows that the current counter-trend rally may gain from 2.02% to 7.97% depending on different targets it may reach in the short term.

In [7], Urban Carmel has provided similar price targets for this rally:

Using Fibonacci ratios, targets for a retrace of the recent fall are 193 (38%), 196 (50%) and 199 (68%). These levels correspond to gains from here of 1%, 3% and 4.5%, respectively. If SPY repeats the pattern from August, it will rise to $200, which was an important area of support during most of 2015. That would equate to an 8% gain from Wednesday's close. Is this a reasonable target? Yes.

Conclusions

CXO Advisory Group has been collecting data from market forecasters since 1998. The firm has tracked and graded thousands of market forecasts made by dozens of popular gurus over the years. CXO has concluded that the market experts accurately predicted market direction only 48% of the time. This says that Mr Market clearly has its own mind.

Even we cannot tell if the stock market has entered a bear market or not, investment in 2016 will remain a tough one for sure. To say the least, it will be very volatile.^[3,8]  Chris's model is based on facts and maintains maximum flexibility.^[1,2] As he said everything is probability. Based on current facts, we have an unfavorable risk profile in stock market. However, as in year 2003, 2009, and 2011, ugly markets can also begin to improve at any time.

Enjoy the current rally as long as it lasts. But, remain vigilant!

References

1. Monthly Stock Signals Similar To 2001 & 2008 (CiovaccoCapital)
2. Chris Ciovacco (twitter)
3. THE LAST INNINGS: HAS THE BULL MARKET ENDED? (Goldman Sachs)
4. Vanguard's Economic and Investment Outlook
5. Three Charts that Predicted the Current Downturn...and Have Yet to Recover
• Using three long-term charts, they all show us red flags that  foreshadow the longer term trend for stocks has either changed or is susceptible to further declines.
6. As Goes Oil, So Goes the Market
• Based on the confluence of oversold technical indications, Kurt Kallaus favors that an initial momentum low in stock prices has arrived and that a bottoming formation is the most likely outcome over the next 3 to 6 weeks.
7. The Fat Patch Weekly Summary 
• Any number of breadth and sentiment indicators strongly suggest that prices should rise further in the weeks ahead.
8. China Volatility Raises the Question: Did the Fed Make a Mistake?
• Miller’s data shows a dramatic slowdown in China that has both short- and long-term repercussions. He expects a lot more volatility in the markets, and this will affect the way the Fed views stability.
9. Where From Here For The S&P 500? (good)
• While the rally would take the price higher it would be short-lived, because it is a Contra Trend move. 
• The kinds of material changes in outside circumstances that could change the primary trend and take the rally to new heights might be something like Saudi Arabia reducing oil production or the Fed backing off of a March rate increase.
10. A hedge fund manager shares the 10 things that could surprise the market this year (good)
11. NYSE Margin Debt Renews Its Decline (Doug Short)
• Current level of NYSE margin debt is well off its record close in April and showing a pattern similar to what we saw following the market peaks in 2000 and 2008.
12. JPM Says Window To Buy Has Closed: "Start Fading The Bounce Within Days"
• Equity markets could be down this year irrespective of the US growth trajectory.
13. Short-Interest: Being Bear Is Back In Vogue
14. Citi Asked its Clients If We're Heading Into A Bear Market and This Is What They Said
• According to Citi, the wildcard in calling a stock market correction vs. a full-blown bear remains the direction of the Chinese economy.
• At the global level, recent events seem to reinforce the [Citi Chief Economist Willem] Buiter view that the risk of a China-led global recession is rising, but just how much of this is now priced into markets is unclear.
15. JPMorgan slashes outlook for stocks, citing Fed's 'diverging pressures'
• Having previously ended 2015 with an S&P price target of 2,200, JPMorgan recently cut that number to 2,000.Despite these risks, Lakos-Bujas did not call for a new crisis. 
• A recession "is a possibility, but I [Lakos-Bujas] wouldn't say that. I would more so say that [there's] concern over a bear market. With the S&P around 1,900 right now, that could mean we maybe see 1,700 at some point."
16. US consumer is the last defense against strong dollar drag on the economy
17. Scary Stock Charts Speak For Themselves (updated on 02/05/2016)
18. Timing The Bear Market And The 90/10 Rule
• If a nascent bear market has really appeared in the week ending June 26, 2015 as described in this article, try to avoid trading the bottom (i.e., to benefit from counter-trend rally) during the violent phase of bear market drop which is estimated to be in the following period:
• 02/2017 - 10/2017
19. Bear Market Rallies
• Bear market rallies can last as short as a week or as long as 3 months. Gains are at least 7-8% and can be as much as 20% or more.
20. Bill Hester, CFA ‏@billhester Feb 19
• Percent of up days in bull markets since the 1930's: 57%. In bear markets: 45%. Up day percentage since last May: 46%.
21. IDENTIFYING BEAR MARKET BOTTOMS AND NEW BULL MARKETS