Introduction

The key question regarding the recent 19% decline in the cash S&P 500 is whether it represents a mere correction that would be followed by a resumption of the bull market, or the start of a bear market.

Based on the trading pattern in late January, the stock market looks like it may have bottomed in a manner similar to other large corrections in history. Following a 3-day weekend, stocks plunged at the open on Tuesday, January 22 despite a surprise 75 basis point interest-rate cut by the Federal Reserve.

After closing well off its low, the cash S&P again plummeted on Wednesday (January 23), taking out the previous day's panic intraday low, only to reverse massively higher by the close (Figure 1 below).

Also on Wednesday, the NASDAQ 100 became the last major stock index to undercut its March 2007 low (Figure 2), and the Dow Jones Industrial Average closed beneath its March closing low in a successful retest of its May 2006 high and January 2000 bull market top (Figure 3).

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The Age of the Bull Market in Stocks

Normally, when the longevity of a bull market surpasses the 5-year mark we must remain alert for signs of a final high. The 5-year and 1-day interval from October 10, 2002 to last October 11 places the lifespan of this bull 4th among the 16 bull markets in the S&P since 1928 (Table 1).

However, the comparatively modest 105% gain the S&P 500 has experienced to date (Jan 25, 2008) falls well short of any of its 5 longest predecessors (the only ones to exceed 4 years in length).

In the Dow, which includes the epic 1921-29 era, the dichotomy is even more pronounced. The top half dozen bull markets in the Dow rose between 130% and 504%, while ours has yet to even double (Table 2). This suggests that the bull market could still have room to run.

In addition, the last leg up in the S&P was just one month and 25 days old on October 11 - nearly 4 months less than the average final leg. Were it to give way to a bear, it would rank as the 2nd-shortest concluding leg.

Overbalancing of Recent Stock Market Corrections

What about the fact that the most recent correction in the S&P, in percentage terms, has significantly overbalanced (exceeded by at least 20%) the last 5 corrections in the bull market?

Although more recent corrections are generally the most important, the latest decline isn't all that much greater than an earlier 17% drop between December 2, 2002 and March 12, 2003 (Table 3). And it would be unusual in a bear market, before an overbalancing takes place, to witness as sizable a rally as the sharp 2-week advance our market experienced from the November bottom.

Likewise, the 3 months and 12 days that elapsed between our October 11, 2007 peak and January 23 low, while longer than the last four corrections, is actually shorter than the March 5, 2004 to August 13, 2004 slide, and virtually on a par with December 2002-March 2003.

The Latest Decline vs. Previous Large Bull Market Corrections

In fact, this decline has moved just past December 2002-March 2003 to rank 9th (of 60) among the longest S&P corrections ever (Table 4). We can see that 7 of the top 10, all of which lasted over 3 months, suffered percentage drops at least in the teens. Thus, the magnitude of this slide is consistent with other moves of similar duration, unlike the prevailing situation for the bull market as a whole.

7th-Year Declines in the Stock Market Extending Into the 8th Year

It would probably be unwise in the near term to chase this rally, which started with an explosive 625-point intraday reversal higher in the Dow Industrials on January 23. Even if that proves a climactic end to a deep correction, much backing and filling can typically be expected on the heels of a spike low of such import.

Also, with perhaps the earliest seasonal bottom for a 7th-year decline extending into a decade's 8th year (the others established final lows on April 2, 1888, March 25, 1898, March 31, 1938, February 14, 1948, March 5, 1968 and March 1, 1978, respectively), an ensuing leg up may have trouble really taking off through much, if not all of the first quarter.

Here at Gann Global, We plan to let the market tell us what to do. As long as this continues to look like a bull market, we will seek to buy on weakness, especially after a credible secondary low.