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There is a raging battle between the bulls and the bears on the Internet. On Twitter and trading forums the bulls are winning. Not surprising, the stock market has been rising for five years. Each time there is a pullback the stock market rallies to new highs. This pattern has been repeating itself for so long that the bulls are becoming over-confident and arrogant, rather than argue any valid bullish logic their recourse is to ridicule and scorn the bears instead.
Personally I don’t think the bulls should resort to ridicule, they should be listening as the bears do have a point. In fact there is no wrong or right to be a bull or a bear, remember the old stock market saying “Bulls make money, Bears make money, but pigs get slaughtered!” The key is your time horizon. Are you bullish or bearish intraday, short term or long term? When you segment investors by time horizon everybody is right and no one is wrong, so it is illogical for the bulls to tease and laugh at the bears, this merely serves to detract from the possibility that the bears will eventually be proven right and this kind of closed mindedness is a fine example of a contrarian indicator.
My view is that the bears will have their day in the long-term while the bulls will continue do well in the short-term. Why? Because we are in a transition period that is characterised by:
• Completed Elliott wave pattern. The five-wave pattern on the long term chart is ominous. Why? Because it could be the final impulse wave within an upward double zigzag pattern from the 2009 low. The top of wave (5) would coincide with the 2000 high [6950] and inside wave (5) is a five-wave expanding diagonal triangle which is a bearish pattern.
• Extended Bull market in its fifth year. Bull markets normally last two years on average.
• First degree extreme in bullish sentiment. This condition occurs at major market tops.
• Fed tapering asset purchases
• Stalling global economic recovery
This transition will lead to the next bear market and because the bull market is already five-years old the next bear market will last two years or more. Therefore the long-term bearish point is valid and not to be held in contempt. If you are a long-term investor it would be prudent to step aside or protect your portfolio for a major decline. What I cannot predict is when the next bear market will start – it could follow in a month or two or six or more. These things are never easy to predict but the evidence towards a market top is growing ever stronger.
In the meantime the bullish short-term trade continues to thrive and is well supported each time the market drops by the extreme in bullish sentiment. If you look at the recent rallies, after every recent correction follows a powerful move propelled from the lows due to the high proportion of bulls prepared to buy. Do not be afraid of each dip, your task is to buy the dips but take the short-term profits after each rally to new high. You want to be out at new highs in case the market turns down and the inevitable bear market commences.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
