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Are We There Yet?


Stocks have declined an average of 1.4% a year for the past 11 years, isn't that enough?


Professor Depew,

Does the yearly chart of SPX suggest we're probably going to have seven more bad years?

Minyan Dennis

Click to enlarge

Minayn Dennis,

Here's the chart of the S&P 500 on a yearly basis with TD Sequential overlaid and TD Lines included.

I have good news and bad news. TD Sequential sell signals typically resolve within a 12-bar time frame. The 13 sell signal that recorded in December 1998 has now been active for 11 years.

That's the good news. It means that, technically, the S&P 500 will next year complete the full window for the TD Sequential Countdown signal to be active.

The signal itself was quite good, though many were grumbling about it in 1999 and early 2000. Since it registered, the S&P 500 (excluding dividends) is down 14.62%, representing an average annual loss of 1.4% over the past 11 years.

Now, for the bad news. The red solid line represents a TD Line that was broken in a qualified manner this year, though just barely.

To qualify the break, we needed a lower open this year compared to 2008, and we got it, though by a mere 26 cents. The reason that qualification is important is because TD Lines allow us to make potential downside projections, and the downside projection here is 327.71.

To be clear, this represents a possibility, not something etched in stone.

To answer your question about seven more years, I presume you're referring to the fact that the green 2 underneath this year's bar means a potential TD Buy Setup is only two bars into a potential 9. Keep in mind, though, that setup requires the close to exceed the close four price bars earlier in consecutive years. And, this early in the setup, there's certainly no guarantee we proceed to the full 9 count.

Among other indices, the Dow Jones Industrial Average didn't register its TD Sequential yearly sell signal until 2004. It too has violated a TD Line in a qualified manner (target 3728.19).

But let's pause for a moment and consider something more optimistic.

Click to enlarge

Take a look at the Nasdaq Composite chart. Although it recorded a TD Sequential sell signal concurrent with the Dow in 2004, what I'm interested in is that it held its TD Line, and could instead potentially break an upside TD Line. We shall see.

So what to do? Now that next year represents the final year in the 12-bar window for the TD Sequential sell signal on the S&P 500, I'm moving down the time frames to follow the quarterly chart, which could record a TD Buy Setup in the first quarter of 2010.

What I'm looking for are signs that a major, long-term stock market bottom is being recorded.

Make no mistake, we could easily have seven more choppy years of churn. So the way to play that, in my opinion, is to begin separating the broad market from individual stocks, and look for stocks that are separating themselves from the broad market action.

Consider Cisco (CSCO), for example.

Click to enlarge

Cisco will actually record a bullish price flip this year if it closes above 17.12. It's also broken two TD Lines in a qualified manner with long-term targets of 50.66 and 80.82, respectively. So far, it's held its downside TD Line at 14.24 this year. That looks like interesting risk/reward to me.

On the shorter time frames, weekly and monthly, Cisco should likely come under pressure in December, possibly along with the broad market given our analysis above. I want to be a buyer into that weakness as long as the quarterly and yearly bullish price flips hold.

Bottom Line: I believe a very intense deflationary leg down remains ahead of us, but there are still stocks that are beginning for the first time in years to show positive risk reward. These stocks too may decline if the deflation intensifies, but declining stock prices are not something I'm worried about. I'm worried instead about building positions in companies that will likely not go out of business. For now at least, Cisco looks like one of those companies.

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No positions in stocks mentioned.

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