The bull market is over; the Dow Industrials broke below its major bull market trendline extending from the 1982 bear market lows through the 2002 bear market lows. Obviously, one cannot take this lightly, as last week's negative price action was more of a bear market "exclamation point" intended to say that from this point forward - rallies are to be sold and sold hard. However, it would appear the initial decline is coming to an end quite soon; the 30-month moving average crosses at 12,038 and was successfully tested on Friday. Too, the previous highs all-time highs at 11,500 are just below current levels. The 9-month RSI is approaching levels that in the past have coincided with bull market correction bottoms and bear market bottoms. Thus, the risk-reward profile for the Dow is changing in the short-term from bearish to 'flat' and will ultimately turn to bullish. But, remembering that the trend is lower... rallies will be short-lived.
But that said, one would do well to consider 'guerrilla bear market tactics' when trading from the long side, of which sector rotation will be paramount. Rallies are likely to be short and sharp; but sold hard. The sectors now showing emerging bullish relative strength patterns versus the S&P 500 in our models are the beleaguered Financials and Consumer Discretionary (Housing and Retail). The Basic Materials and Energy sectors are showing emerging negative patterns. These are non-consensus calls at the moment; but given the former held relatively during last week's carnage, while the latter were aggressively - perhaps these will be the emerging theme trades of 2008.
