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Signs of a Secular Decline

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Editor's Note: The following is a free edition of Jeff Cooper's Daily Market Report. For a two-week FREE trial of his daily commentary and nightly day and swing trading picks, click here.

Yesterday, we showed the 3 drives to a high on the weekly S&P 500 (^GSPC) chart plotting March 2009 low to early April 2012, followed by a 4th swing to a test failure 180 degrees or 6 months later into the September and October double ‘square-outs’.

The markets often play out in 3’s so I think there is a better-than-average likelihood that the rally up from 2009 was a rally in a secular bear market.

Mr. Market has done a good job of embedding in players the notion that the market always comes back.

After the Internet Bubble popped in 2000, the market came back from a two-year decline.

Next, after a horrendous debacle in the crisis of 2008, the market rose from the ashes.

Mr. Market has done an excellent Lazarus look-alike job.

And from the three sharp declines in 2010, 2011, and into June 2012, the market rose from the dead every time.

So now after three big drives toward 1500 over 12 years and 3 drives up from the 2009 low, we’re going to see if this time is different.

With the Fiscal Cliff about to be dwarfed by the impact of the Obamacare Cliff, most professionals are liquidating into year-end in front of the huge hit the economy is going to take. They have adopted an attitude of discretion lest they lose their job, precipitated by the crash in the most owned and loved stock on the board, Apple (AAPL).

AAPL has become the classic source of funds with money managers trying to beat each other out the door while salvaging 2012 profits.

Above I noted the double square-outs that we flagged in September and October that forecast some kind of top. What kind of top was unknowable at the time without the help of the cycles.

Let’s recap those since the market has responded with authority to the downside to those double time/price squareouts.

First, 1467/1468 ties to September 13/14.

1467/1468 is opposite September 13/14.

Click to enlarge

The S&P scored a new recovery closing high of 1465.77 on  September 14 (with an intraday high of 1474.51).

This occurred within just a few weeks of our forecast of a major cyclical high at/near the anniversaries of the early September 1929 top, the late August 1987 top, and the late August 2000 test failure top of that year's March peak.

Like 2000, here in 2012, 144 Fibonacci months later, the market carved out a top in the Spring followed by a secondary top roughly 6 months later.

The second square-out we warned about occurred on October 5 which is opposite 1460 on the Square of 9 Chart. This was going into another powerful anniversary date, the 10-year anniversary of the 2002 low and the 5-year anniversary of the 2007 all-time high.

The power of these square-outs and anniversary dates should be underestimated only at your peril.

Now that the election is over, all the talk is on the Fiscal Cliff. With politicians consumed by the election and unwilling to do their job until November, is there really enough time to do anything by January 1, 2013 other than imitate the EU's Abbott & Costello Kicking the Can Down the Road/Who’s on First Routine?

The stock market is being forced to judge the odds of politicians getting down to business and doesn’t like what it sees. It sees that the business of America is not the business it used to be.

With the S&P flirting with its 200 dma and the 50% balance point/mid-point between the June low and the September high, today’s solar eclipse may pull back the kimono to give us a peak at the cycles as to whether we get to our primary target of 1325 to 1270 sooner or later. Either way, I expect to get to this primary target window by mid-December which is 90 degrees/days from the high, and when money managers may take the foot off the liquidating pedal.

Following yesterday’s holiday trade, we’re bound to get volatility again today, especially with the VIX (^VIX) backtesting its 50 dma.

I didn’t like the big pullback in the VIX, suggesting complacency as the S&P flirts with its 200 dma.

It suggests there is a high degree of optimism that the flirtation will be consummated. However, the acceleration following the break of the turndown in the monthly S&P suggests the quarterly wheel of time is in the crosshairs. This is the July low at 1325. It also ties to the high of the low bar week from the June low.

Whether the anticipated crash into the Gann Panic Window last week saw the vast majority of shorts cover, allowing for the market to  stabilize and drift/rally into this Friday’s big monthly option expiration or whether the flirtation with the 200 dma will be rejected right here, we’re probably going to find out today.

The S&P does show a possible Pivot Low, a low surrounded by two higher lows, at its 200 dma. This coincides with a third tag/drive to the bottom rail of a descending channel (green).

The normal expectation would be for a rally attempt, but when normal expectations do not play out, fast moves develop -- in this case a failure and flush out to the downside.

And with the trend decidedly down, and surprises occurring in the direction of the trend, caution is warranted with today’s solar eclipse which is often a harbinger of volatility.

Conclusion. The trend remains down with few signs of change. There is massive resistance overhead between 1396 and the Monthly Swing Pivot at 1403.

This weekend’s report will walk through what to expect in terms of duration and decline if this is a new bear leg down, as I suspect. But one major reason for caution is that the 808 point range from the 666 March 2009 low to the September 2012 high squares the March 6 low and the September high, ‘proving’ the geometry of a top of significance. We’re going to fully walk though this as well in the weekend report.

So until the tape suggests otherwise, I would play the bear probabilities and short rallies when they come.

Secular bear markets, unlike cyclical corrections, are global in scope. The chart of the Global Dow (^GDOW) below shows the world’s 150 largest companies accelerating to the downside.

So until the tape suggests otherwise, I would play the bear probabilities and short rallies when they come and wait and see if the market can cobble together anything more than 2 to 3 up days following any big momentum rally.

Form Reading Section

POSITION:  No positions in stocks mentioned.