Primary Bear Trend Intact

The primary difference between the 2000 and 2008 tops and the corrections since 2008 is their shape, which is made clear by the 10-month/200-day moving average. All the corrections going back to the late 1990s ones show a similar spike down. In nearly all cases, the bulk of selling occurred within a single month of trading. After losing the moving average, the index was back above by the third month. The 2000 and 2008 tops were different. While they did start with a sell-off, it was a modest one compared to the corrections. The 10-month moving average was tested and then failed. The moving average would not be meaningfully recovered until the new bull market was underway.

The S&P 500's 200-day moving average is at 4460. Ideally, the market would pop about 1.7 percent on Monday or maybe by Tuesday, then roll over. There's some wiggle room though. The 4500 to 4600 area allows for about a 5 percent rally before coming up against the topping pattern. 

The sharp correction in the Nasdaq in 2000 did produce a bounce above its moving average. For the Russell 2000 Index today, it would take a 10-percent rally just to get back to the 200-day moving average.

A meaningful bounce that also crushes the VIX is the best setup for bears since it would allow for a break to new lows with cheap options entry. The 200-day moving average is also very slow moving, so it could set up yet a larger bounce up to the average before rolling over "for good" later this year.

If you experienced the 2008 bear market, you may remember that even after Bear Stearns failed and there were clear signs of trouble in the housing market, many investors thought it was only a blip. Everyone was terrified of inflation with oil hitting $150 per barrel in June. Barron's did a cover story on the financial trouble at Fannie and Freddie in mid-August: The Endgame Nears For Fannie and Freddie. All the pieces were coming together, but most investors went into September near fully invested. Then panic set in. The 2000 top was also a slow rollover. Tech blew up first, but everyone was buying the dip because their valuations were anchored at the high valuations. It wasn't until September 2000 that the major indexes finally kicked into selling gear. Defensive sectors would hold out into November and December, with consumer staples peaking in December. See my post calling the top in mid-December: The Bear Pill. Defensive stocks have again proven a haven, with some even hitting all-time highs last week. This is not signaling an intact bull market, rather it signals that there is a clear shift in investor thinking and capital flows.