Historic market rally hits resistance

One of the most persistent advances in stock market history nears its end.

By Anthony Mirhaydari Jan 19, 2011 1:13PM

Technically, we are now at a decision point. The S&P 500 has scratched its way back to within inches of 1,300, which hasn't been seen since August 2008. This marked the end of a temporary two-month rebound within the 2007-09 bear market. The bears will be camped out at that level with sniper rifles, ready to ambush overeager bulls.


And, boy, have the bulls been enthusiastic. Since Dec. 1, the S&P 500 has closed above its 10-day moving average for 32 days in a row. Aside from a similar low-volatility run last April that ended in disaster and the May 6 flash crash as investors all tried to sell at the same time, you've got to go all the way back to 1997 to find another period of similarly persistent performance.


Runs like this are extremely rare.

 

 

Using market data going back to 1794, courtesy of the folks at Global Financial Data, the average length of persistence for the S&P 500 to stay above its 10-day average is 7.7 days. And out of nearly 24,000 days of price information, there have been only 27 rallies of 32 days or more throughout all of history.

Uninterrupted market advances have been even rarer in the frantic computerized trading world of today. Since 1972 there have been only three 32-plus-day rallies above the 10-day moving average, including the current one. So clearly the past two months have been pretty unique. 


What's more, these persistent rallies tend not to end well. After a 35-day advance ended in summer 1997, stocks spent the next six months in a sideways trading range, with a maximum peak-to-trough loss of 13%.  The past year's summer decline took the S&P 500 down for a maximum loss of 17%.

 


Every day I see more signs of weakening from within. Take the price action in bellwether stock General Electric (GE). For whatever reason, maybe because it's a conglomerate with exposure to so many facets of the economy, GE tends to lead the broad market. When the two disagree, it's GE that tells the truer story about where equity prices are headed. 


On Tuesday, GE formed a big fat bearish reversal pattern after jumping up in the opening minutes of trading and spending the rest of the session sliding lower. Shares closed with a loss of 1.2%. Previous examples of this pattern were seen last April, June and July ahead of protracted broad market declines.


With investors abandoning an iconic blue-chip issue like GE, what does that say about their appetite for all the other smaller, riskier stocks that compose the equity market universe? 


To my eyes, it suggests one of the strongest market rallies in history is coming to an end. To use a sailing metaphor, there are too many storm clouds on the horizon to expect the easy seas to continue. I'm looking for trouble as inflationary pressure rises and the European debt crisis reaches a new, more dangerous phase: debt restructurings and defaults.

While I don't think this will be enough to derail the long-term bull market, it will sure be painful. The good news is, if you've been sitting on the sidelines, the correction will provide you an opportunity to reallocate into equities at a discount.

 

Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned.

 

Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers.


The author can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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