Savage bear markets beget spectacular bear market rallies. Having halved in late 1929, US equities gained more than 50 per cent by April 1930. Japan’s stock market also enjoyed a rebound of the same magnitude following its catastrophic descent in the early 1990s. In both cases, however, the recovery proved a false dawn and the indices slumped to new lows. This week, the US’s S&P 500 index notched up a 50 per cent gain from its March lows.

But, in spite of the heavy losses that preceded its fantastic surge, the S&P never reached screamingly cheap levels. At its lowest ebb, the index traded on around 13 times cyclically-adjusted earnings. Historically, bear market bottoms have tended to involve single-digit earnings multiples. And in spite of government-sponsored window-dressing, the US’s banking system remains insolvent, which will undermine any lasting economic upturn.

On March 21 – shortly after the lows – I suggested that the biggest corrective rally of the bear market to date might be underway, with a potential target of 864. While correct about the S&P’s direction, I clearly underestimated the scale of the reaction. However, my Elliott-wave interpretation is that US stocks remain in a long-term bear market and that further significant losses are on the cards.

The S&P’s rise through 1,000 has left it overbought on a daily view, making a near-term pullback very likely. Beyond that, though, the rally could easily push higher, with potential targets at 1,014, 1,054 and even 1,102 or 1,121. Reversals around one of these levels would make excellent short-selling opportunities. A drop back through the 21-week exponential moving average (918 today) will open up 856 and beyond. Further out, the S&P will retest its 666 low of March.

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