Finanacial index bull market indicator

Discussion in 'Trading' started by tradestrong, Mar 20, 2008.

  1. Ok, I have a theory that I'm going to test out.

    Basically, it's a well known fact that in the beginning stages of a bear market, the financials are usually the first to kick the bucket. Which makes sense because usually near the bull market peaks, liquidity usually gets constrained by high interest rates and high energy costs. This in turn causes banks to tighten lending standards and the financial markets to lock up. Granted, we just had a financial bubble, but even so, really, the financials crashing first during a bear market is nothing new.

    I've done some research, and based on historical information, it seems to be a pattern that the financials have been rallying for a good period of time before the cyclical bull markets start their stampedes.

    So, my theory is this:
    It's very simple. Using KRE as a benchmark, if KRE stays above its low for 6 months, I'm going to take that as a sign that a bull market has started. Each new lowest low will start the "timer" over. Let's see how close this indicator is to the next bull market.

    Right now, KRE had its low of 30.25 on Jan 21st. So, we are at exactly 2 months for this "indicator".

    Any thoughts or criticisms on this?
  2. paden


    Seems pretty logical.

    Why KRE instead of XLF? XLF seems like a financials indicator, while KRE seems like a banking indicator.

    Are you using this analysis to help you trade?
  3. I should have been more clear actually. Yes, I'm preferring the banking sector as a more accurate indicator. The reason I say that is since KRE holds more of the banking sector, it also represents the more stable picture of the financial sector. IMO, the banking sector has higher quality institutions that will "fund" the next bull market. This "funding" is what will prop up the economy and allow XLF and the type of companies it holds to benefit.

    So, in short, since KRE holds more stable companies, it should also recover the quickest, which should give a better forward indicator. XLF is more of a "concurrent" indicator of the "current" state of the economy.

    Does this make sense?
  4. The next 2 weeks are going to be critical. If KRE survives above its low of Jan 22, it will be the longest period of time that it has floated above a "new low" since the end of 2006. This could be the beginning of the financial recovery. "Officially", I won't consider the recovery in full effect until a full 6 months, but I will consider this a very important sign that the probability of the beginning of the recovery as being very high.
  5. Today KRE broke below its Jan lows. Thus, the 6 month "indicator" starts over based on this theory that this bank index is a 6 month predictor of when the next bull market will start.

    So now my timeframe will be looking to add positions in the financials around the end of Oct. as long as the index is decently strong at that time.
  6. July 15th is the new low date. KRE fell to 21.71. My own personal feeling is that may be the bottom. Of course, I won't declare the bear over until I see the 6 month requirement, so the soonest we can declare the bear over is Jan 17th of next year. And even so, I believe we will have at least another 6 months of basing beyond that. But we'll see. So I'm waiting until Jan. to indicate that stocks (and specifically financials) are a low risk buy.
  7. Well, interestingly, KRE has continued to show strength not breaking through the lows of July 15th and bouncing off them with considerable strength.

    So, we are now getting "close" to the 6 month target which will be Jan 15th.
  8. um in 2000 it was the fall of tech stocks that began the bear market and not financials

    yea your system is worthless
  9. hmm...ok, so 6 months and 1 day and KRE matches it's low. So, here we go again. Starting over. The 6 month clock starts ticking again. :D