The new all time highs in most of the major averages over the past two weeks has reduced the number of bearish articles on the stock market, but don’t expect that to last for too long. In late January and early February, the new bear market articles reached a high level, which was part of the reason I focused on some of the market’s past major corrections in Tell Tale Signs of a Correction.

I was very pleased with the response to this trading lesson as it received over 75,000 page views in the first few days after it was released. The article focused on the type of patterns and warnings one can get from the NYSE Advance/Decline before a significant stock market correction.

In the follow-up article (More Correction Warning Signs) I looked at some of the short-term corrections that can take the S&P 500 down 6-12% from its highs. As I noted, these are sometimes more difficult to spot in advance as they are often much shorter in duration.

In this week’s trading lesson, I want to concentrate on the recent bear markets to see how an investor or trader can use economic data along with technical analysis to gain advance warning of an impending bear market. There are currently no signs that we are even close to a bear market, in fact, I think it is more likely that stocks will melt up.

There is a very close correlation between bear markets and recessions as stocks generally top out before the economy officially enters a recession. Therefore, a key part of my market analysis is to follow a number of economic indicators. My favorite is the Conference Board’s Leading Economic Indicator (LEI). It is a composite of ten fundamental indicators and is reported monthly.

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As the excellent chart from www.dshort.comdemonstrates, it has a good record of peaking out well before economy enters a recession. I have added annotations to the chart for this discussion.  For example, the recession in 1969-1970 started in December 1969 but the LEI peaked seven months ahead of the recession, point 1, in May 1969.

The bear market in 1973-1974 was the most severe since the crash of 1929 as the recession started in November 1973. The LEI peaked eight months earlier in March 1973, point 2. On the chart, I have identified six different bear markets, and in 1979-1982, there were officially two different recessionary periods.