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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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The Fear of the Bear is Worse Than the Bear Itself!

"Red ink to set record," read the front-page headline of a mainstream daily newspaper recently. The story was accompanied by a graph done in red ink, which shows the projected federal budget deficit from 2004 into 2009. While the political overtones of this story were thick, the point was that the U.S. economy is headed for "disaster" unless something is done to avert the "crisis." (If I only had a dollar for every time this year I've heard those two words!) This headline pretty much captures the tone of the news we've been hearing all summer, most of it negative. And as we all know, whenever the mainstream press starts printing front-page bearish headlines, it means the "crisis" in question has already been digested by the market.

The financial headlines are still bearish, as evidenced by the following clippings from the past two days:

"Record oil prices fuel widespread anxiety," "Bulls succumb to payroll pessimism," U.S. jobs data cast doubt on economic recovery," "Greenspan is running out of buttons to push," "Tech woes outweigh upbeat Fed message," "End of earnings growth era spells trouble for equities."

But wait, there's more:

"Indices slide on oil and tech fears," "Domino fear in United pension move," "Concern over softening of world economic expansion," "Footsie falls on energy fears," "Record U.S. trade deficit follows rise in imports." Like I've been saying, it's the "year of the fear."

In my opinion, these headlines are really "hooks" put out by the insiders to lull as much of the public as possible into a state of fear. The main targets are the bears, who keep getting more bearish with each passing month, just like they did in 1994 the last time the 10-year cycle bottomed.

Against this bearish backdrop, unnoticed by most, the NYSE Advance/Decline line since about April has been diverging to the upside against the Dow 30 and S&P 500 indices. Also unnoticed has been the fact that the Dow Jones Transportation Average (DJTA) is still trending above its 200-day moving average, yet another example of relative strength versus the broad market in the immediate-term.

The real test for the broad market, however, will come in September when the dominant interim cycle heads into its final "hard down" descending phase along with the 10-year cycle (both due to bottom by early October). This will test the longer-term uptrend in the major indices and will tell us whether we are in a recovery bull market or merely a bear market "correction" phase. I maintain that the Dow's 10-year moving average (120-month MA) will remain unbroken during the final low of the 10-year cycle in September. If it does it will underscore my point that last year began a recovery bull market (emphasis on recovery, as opposed to a roaring bull market a 'la the late 1990s) that should last the better part of this decade.

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