INVESTING: Investors: Fear market as you would hungry crocodile

Twenty-one years. Twenty-five years. Sixteen years. This is how long it took the three bear markets over the last 105 years to get back to their pre-bear peaks. We are now more than five years from the peak of the greatest bull market in human history. How much longer will this one take?

Judging from the levels of insanity present at prior tops, we could be here a while. It took 25 years to reclaim the 1929 market highs. The 2000 top generated more euphoria on a global basis than what was experienced in 1929. As I mentioned, we could be here a while.

I am dragging out my 100-year Dow Jones chart today because during these long bear markets, there are cyclical, or short-term, bull markets. That is precisely what began in March 2003.

We are coming to the end of that bull market, and by this time next year we will be full bore into another one of these dramatic declines. The good news is the cumulative sell-off should not be as devastating as the last bear market. The NASDAQ may only need to fall 45 percent instead of 75 percent.

In February of this year, I alerted you that we might be in the early stages of the demise of this bull market. I predicted that 2005 would continue to see new rally highs in the major indexes, yet the rallies would become more selective.

The first piece of evidence to support this theory came from internal statistics from the NASDAQ market. The NASDAQ set a new rally high at the end of December, but a number of internal measurements set lower highs at the same time. This is a clear negative divergence, and it has grown worse all year.

Picture a crocodile’s mouth as he is positioning on the riverside to sun himself for the afternoon. He gets himself comfy, then slowly opens his mouth as wide as it can go. Then something catches his eye and he slams his mouth shut instantly and with power.

That’s what the market has been doing in 2005. The line that measures the internal condition of the market has been slowly moving lower, while the indexes have recorded new rally highs. This condition can only go on for so long before the croc shuts his mouth!

The negative divergences that have been around the NASDAQ for almost a year have only recently showed up in the other market indexes. That is somewhat of a positive sign. I say somewhat because it creates the potential for at least one more run to the upside for most of the market indexes. The next rally, however, will be even more selective than anything seen since the market bottom of 2003.

Short term, the market has been in a selling mode the past few months, and it looks as if we are closer to the end than the beginning. Caution is key, though, because the last few days of a sell-off tend to be the nastiest.