The Stock Market May Have a Longer Recovery Cycle

Although early indications suggested a positive start for the US markets, there is likely to be a negative bias. The US economy shrinked more than expected in the first quarter. GDP dropped at a 6.1% annual rate (6.3% in the fourth quarter 2008) despite the analysts' prediction 4.9%. It declined for three straight quarters for the first time since 1974. Retail sales fell in April for a second straight month, destroying hopes that consumer spending would help to end the recession. Also April surprised by a very low level of insider stocks' buying.

S&P500 now trading at more than 20 times earnings and at 200-day moving average. According to the technical analysts, in a major bottoming process, the advance towards the 200-day moving average fails (means a possible pullback or correction). In addition, some analysts expect the market to form a double bottom before a real bull market begins. They deny the possibility of V-shaped quick recovery and believe that it is unlikely for the market to continue its rally without a retest of the most recent lows (stocks should become much cheaper before major bull markets begin). Evidently, in the short-term, S&P500 is potentially forming a bearish pattern.

A long-term double top was the result of two bubbles: dot-com and then credit-housing. History evidences that credit bubbles have the longest recovery cycles. Indeed, the recent market rally since its March low did not help many investors to restore erased gains. On the other hand, the theory "reversion to the mean" suggests that all bubbles over-correct to the downside, before they can retrace back to the mean trend-line.

May 2009 Updates

InvAn-3/4 has minor improvements; the input data downloader has been adjusted to source changes. SMAP-2 has minor improvements including prediction accuracy. A new upgraded neural network stock trend predictor, NNSTP-2, has been released. The users of NNSTP-1 are recommended to upgrade their tools, since the development of NNSTP-1 has been discontinued (all-option users eligible for free upgrade). To renew your software go to download page and follow the instruction.

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