The bullish case
Commentary:
At least one index remains above its Nov. 20 low
By Mark Hulbert, MarketWatch
Feb. 27, 2009
ANNANDALE, Va. (MarketWatch) -- I rise, your honor, in defense of the bull market that began last Nov. 20.
I know, I know -- the stock market in recent days supposedly reached new bear market lows, with the Dow Jones Industrial Average last Friday breaking below its Nov. 20 low, followed in turn by the S&P 500 index on Monday. So, by definition, the bear market would seem to be alive and well.
And I furthermore acknowledge that the sentiment data don't tell a particularly bullish story either, as I reported a little more than a week ago.
Still, the evidence never points universally in just one direction, and right now is no exception. So it's worth analyzing the bullish case to see just how strong it is.
Let's start with the notion that fresh and new bear market lows have been seen in the past week. This is not entirely true, believe it or not.
Not only is there one index that did not break below its Nov. 20 low, it just happens to be the most comprehensive of all stock market averages. I am referring to the Dow Jones Wilshire 5000 index which represents the combined market capitalizations of virtually all publicly traded stocks in the United States.
And at least according to this broadest of all stock market indexes, the low of the bear market that began 18 months ago occurred last Nov. 20. As of Thursday night, the total-return version of this index was 2.8% above that closing low of three months ago.
That's not a huge margin of safety, to be sure, especially given the stock market's extraordinary recent volatility. But, until and unless the Dow Jones Wilshire 5000 index breaks below its Nov. 20 low, it remains at least plausible to argue that the bear market ended then.
How can it be that the Dow Jones Wilshire 5000 has consistently remained ahead of its Nov. 20 level even while the Dow and the S&P 500 have dropped below it? The answer is that the smallest-cap issues have performed markedly better over the past three months than the largest-cap stocks.
In fact, small-cap relative strength has been impressive. Consider the Dow Jones Wilshire 4500 index, which represents the Dow Jones Wilshire 5000 index but for the 500 stocks in the S&P 500. As of Thursday night, this narrower index was 8.5% ahead of where it stood at Nov. 20's close, in contrast to the S&P 500, which was just 0.39 (or less than one-tenth of one percent) ahead of its close on that day.
Small-cap relative strength is in itself bullish, by the way. When the market begins to turn, the smallest-cap issues are typically among the first to respond to the good news that is just beginning to appear on the horizon -- far more responsive than the more sluggish large caps, for example.
As a result of this tendency, in fact, Gerald Appel and Marvin Appel, editors of the Systems & Forecasts newsletter, developed some years ago a market timing model based on whether NASDAQ stocks or NYSE-listed issues were leading or following. Needless to say, this model currently is bullish.
Technicians often consider divergences to signal potential market turning points, and the divergence between the small-cap and large-cap sectors could be carrying that significance now. Under this scenario, it might be that, even while the less-widely-followed Dow Jones Wilshire 5000 index continues to remain above its Nov. 20 lows, the new bear market lows from the widely-followed Dow and S&P 500 indexes lead investors to throw in the towel -- thereby catalyzing the capitulation for which contrarians have been waiting over the past several months.
That hasn't happened yet. But if it did, contrarians would add their support for the notion that a bear market bottom is at hand.
To be sure, this scenario would be negated if and when the Dow Jones Wilshire 5000 breaks its Nov. 20 low.
But I've seen very few analysts even mentioning the divergence between this index and the Dow and the S&P 500, or its potentially bullish significance. Given my contrary nature, I therefore believe it should at least be pointed out.
AI
