March Outlook: Short Term Oversold Rally In Play, But More Weakness On Horizon
By: Jeffrey A. Hirsch & Christopher Mistal
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February 25, 2016
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The Dow Jones Industrials satisfied the Ned Davis Research (NDR) bear market definition that we subscribe to on the close of 2/11/2016. We first discussed the history of those bear markets on our blog last month and further clarified the nuance of bull and bear markets after a call from the folks at NDR. The majority of NDR bear market did not last much longer or decline much further. But, it is not an overwhelming majority, so danger still lurks ahead in the market.  Here is the updated table.
 
[NDR Bear Table]
 
Now that the bear is here and nearly half of the average cyclical bear market decline has transpired already, we are presented with a bit of a paradox between our long-term and near-term outlooks. 
 
Our longer term outlook, one that we have been sharing for some time, has called for a bear market or an overall decline from the highs of about 20-30% during the 2016-2018 timeframe. This is the typical move of the last cyclical bear market at the end of the secular bear market. 
 
We have contented and still do that the secular bear that began around the year 2000 is still in play and will end with a downturn similar in nature as we experienced from 1980-1982. This is what we believe has a high probability of being underway currently. 
 
We have examined previous secular bear markets and how they ended. The final cyclical bear of past secular bear markets tended to be milder and somewhat dragged out. So we expect approximately a 30% overall decline, from the May 2015 highs to perhaps an ultimate bottom in 2017 or 2018.
 
Short-term, however, the market reached heavily oversold levels in mid-February. Sentiment was roughly bearish enough to be somewhat of a contrary bullish indicator, so we are looking for a modest rally to close out the remainder of the Best Six Months – now through April/May – though we do not expect new highs this year. Beyond April/May we expect more weakness over the summer, especially as the elections really begin to heat up. 
 
Our current short-term view now is based upon current economic data, technical indicators and seasonal factors and influences. 
 
Pulse of the Market
 
February opened on a mildly positive note that proved short-lived as the market quickly sank to new lows on the eleventh. At which point, the market had become over-sold, sentiment was sufficiently bearish to be bullish and the market has bounced back. Full-month February is now flirting with positive territory. 
 
After briefly turning negative mid-month, the faster moving MACD indicator (1) has joined the slower moving MACD indicator in confirming the shift in market momentum. However, momentum has begun to wane as DJIA appears to be running into resistance at it rapidly falling 50-moving average (2). A break out above this level would likely secure a full-month gain, the fourth gain in a row following the last four down Januarys.
 
Dow Jones Industrials & MACD Chart
 
Early-February weakness was foreshadowed by the second Down Friday/Down Monday (DF/DM) of 2016 on the eighth day of the month (3). This DF/DM was followed by further weakness immediately. Including the losses on Friday and Monday, DJIA was down five days straight ending on the eleventh. It then bounced nearly 794 points higher in the next three trading sessions, bucking typical President’ Day weakness
 
During the shortened trading week after Presidents’ Day, DJIA (4), S&P 500 (5) and NASDAQ (6) posted their best weekly gain of 2016 thus far, but have been struggling with resistance since. NASDAQ and the Russell 2000 have suffered the most in 2016. If they can find footing and move higher, then DJIA and S&P 500 will likely overcome resistance.
 
Last week’s rally was fairly broad based as Weekly Advancers outnumbered Weekly Decliners by over 5 to 1 (7). The prior week was nearly the exact opposite. It will take a few weeks of sustained Advancers outnumbering Decliners for the market to sustain its move higher.
 
New Weekly Highs remain subdued as the broad market is still well off its highs (8). Somewhat encouraging, at least in the shorter term, is the fact that the major indices touched new lows in the week ending February 12, but New Weekly Lows did not exceed the levels reached in January. This could indicate that broad selling has abated. Instead of just hitting the sell button, traders and investors appear to be more selective. 
 
Weekly CBOE Put/Call remains elevated at 0.78 (9). This implies that there is plenty skepticism about the current rally leaving room for it to continue at least in the near-term. Recent readings around 0.60 have coincided with tops.
 
Click for larger graphic…
Pulse of the Market Table