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Mama Bull and the Little Bears?

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There is now an environment where it is possible to have vicious bear markets in certain sectors, without having a generalized Bear Market.

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Yesterday's late day Buzz by Prof. Krueger pondering whether we are or aren't in a bear market is precisely why I got hooked on this site a long long time ago; for it is this kind of perspective that has kept my long-time bearish "arse" from getting steamrolled by the bull market of the last five years.

That Buzz also got me thinking about a passing remark I heard on TV a few days ago, suggesting that the nature of the current global financial markets has created an environment where it is possible to have vicious bear markets in certain sectors, without having a generalized Bear Market. The concept jolted me to my "Doom and Gloom" core, and I can't shake its simultaneous counterintuitiveness and logic. What's even more interesting is that, at least for now, the charts seem to lend some support to this theory.

Check out the charts of the S&P 500 (SPX) and the broad Nasdaq (CCMP):


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Looking at these, one cannot suggest that either is in a bear market. Forget the 5-year trend line for a second, the 200 DMA's are not even downward sloping. On the other hand we have critical sectors of the market such as the S&P Consumer Discretionary Index (S5COND) and the Broker/Dealer Index (XBD).


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The above charts have busted their trend lines and have eclipsed the 20% decline that arbitrarily defines a bear market (the debate over the wisdom of that definition is for another day). Things look even more dire if we look at Financials as a whole (XLF) (look at the confirming volume pattern):


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Or look at the Philadelphia Bank Index (BKX):


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The BKX is exhibiting a crash like decline. I won't show the Philly Housing Index (HGX) purely out of respect for the dearly departed.

So can we have a bull market while financials crash? Is Apple (AAPL) safe while consumers stop spending? Can you buy General Electric (GE) while the financial system feels like it is imploding? Has the financial and consumer sector already completed its bear market without the broader indices? These dichotomies, in my humble opinion, are what is creating the tensions we see reflected in the current volatility. Market players just don't know. Few if any have experienced the current toxic brew of debt and derivatives together with the emergence of 2 billion people out of abject poverty. And is the "toxic brew" partly behind the emergence from abject poverty?

I know you've heard all these questions before, and I'll venture that no one has a definitive answer. But if you're in this business for a living, pulling an Omer Simpson and going to watch TV when things get too tough is not an option. We get paid to figure out this stuff or at least to navigate through it. And hence I return to the drumbeat I've been pounding for several weeks now: it is relatively easier and safer to play the violent swings as discrete events, than to stake out a directional position and bet that the market will agree with you.
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No positions in stocks mentioned.
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