The 2007/09 Bear was having its first market correction since Oct 2007. But then Fed Head Bernanke announced, (Wednesday 18 March) that the Fed was going to purchase a trillion dollars worth of worthless toxic liabilities and long term US Treasury Bonds. It's becoming hard to distinguish the difference between the two.
Bernanke lighted a fire under Gold and Silver and seemed to have knocked the wind out of the stock market's correction.
Note how the BEV Plot, for the DJIA, only raised a small amount while in the table above has the DJIA increasing by 14.88%.
The BEV provides us with a strategic view of the market. How far we have fallen, and how much we must rise to see a new all-time high. The table tells us how much money we would have made from the market close of 09 March to 18 March 2009. Both values are correct. But the numbers on the table are the ones that will make or break an investor. I spend time on this subject in this report.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
The 200 Day M/A just keeps climbing. The 40 Day M/A has backed off a bit. If the stock market next week enters into its next bear leg downward, we may see the 40 Day cross-over the 200 Day M/A. That will be bad.
Historically, daily 1% swings from the previous day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
Note the change in the Step Sum's scale to the right. I've re-indexed the right Y Axis to start with the first day of the 2007/09 Bear Market. This allows us to see the net positive and negative days, from the October 2007 market top, through our Bear Market on the chart.
I've yet to plot the 1929/32 & 2007/09 Bear's Step Sums together. So here they are. Note that I've started the Step Sum's Count on the Bear's Terminal Zeros. That starts the count at +1, the last up day of the preceding bull market. Remember, the Step Sum is the net sum of the preceding up and down days. DJIA up: +1. DJIA down: -1. Step Sum: Add the (+/-) 1s.
This is an amazing fact: from day 120 to 485 of the Great Depression Bear Market, there were more up than down days. But on 28 April 1931 (day 486) when its Step Sum went negative, the DJIA had fallen 61.19% from its Last All-Time High. In point terms, the DJIA had fallen to 147.95 from a high of 381.17.
The first chart I show every week, we see that the 1929/32 Bear fell 89.19% from its September 1929 high of 381.17. But I must caution you that percentages in a BEV Chart are based upon the Last All-Time Highs. * From a BEV perspective *, the 61.19% of 28 April 1931 tells us that there was only 28% left to fall in the 1929/32 Bear Market.
But we need to look at this from the perspective of an investor on the sidelines 78 years ago. The DJIA's had a valuation of 147.95 in April 1931. Unfortunately, it was still to fall to 41.22 by July 1932! That would be a loss of 72.13% in the next 15 months! After the bounce of November 1929 to April 1930, there was no good entry point back into the market until July 1932. But who knew that in April of 1931?
In my article on the Lundeen Bear Box and Step Sum, I've charted every -40 DJIA Bear market during the 20th Century. There are exemptions, but typically, big bear markets end with their Step Sums falling dramatically. With the exemption of the Great Depression Bear, note how this happens as those bears approach their BEV -40% lines. But we've already hit the BEV -50% line and this hasn't happened yet.
Will the #2 DJIA Bear Market (since 1885) end without its Step Sum making a dramatic decline? It could. But my expectations are, that we are reaching a point in the market where we will see increasing downward pressure on the DJIA. It appears that we are now seeing our first significant bear market correction. So, if the Step Sum is to make a dive down to the bottom, it will have to wait until after our current bear market bounce is over. After the Bernanke announcement of this week, we may be ready to start down again.
As in any horror movie, the Bear knows he must occasionally relieve tension during the drama. This will maximize the horror of his final scene: a scene I don't think we've seen yet. With his direction of this Bear Market, he has done an excellent job so far.
When we pierced the BEV -40% line last October, it was very horrible and scary. Like the first shock of a horror movie. Then, somehow the Bear succeeded in having the DJIA break below the BEV -50% line, just 6 months later with much less fuss. Other than my readers, who knows that the 2007/09 DJIA Bear has become the #2, all-time DJIA Bear Market? I suspect this fact will soon be widely recognized by the financial media, and fear will build.
I'm still on track for a BEV -60% breaching by June 2009.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum will rise. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
Dow Jones has published daily data on its Averages from 1885 to the present. The New York Stock Exchange has published daily volumes since 1897. Both data series are available in the reference book:
I purchased my copy from Amazon.Com used books and entered the data into a spreadsheet. It was a task. But once finished, freed me from having to source TV and Newspapers "experts" for investment information on the big picture issue of: is it a bull or bear market?
I've expanded my database from old issues of Barron's. Barron's published actual volume for the Dow Averages since 1933, and about everything you've seen charted in my past articles. Barron's once had superb articles on technical analysis using their statistics. I don't mind admitting that there isn't much original about anything I write, except for my Step Sum.
These numbers have drama to them. No doubt there were men, who upon reading the WSJ on a cold day in December of 1906, and seeing the DJIA soaring upwards, felt so empowered that they decided to sell the family's horse and buy one of those new horseless carriages for the holidays. The timing was bad. In a matter of weeks the DJIA went into a -40% Bear Market. Some of these gentlemen were soon without horse or horseless carriage. The stock market has its ways of humbling the proud and the mighty.
The DJIA doesn't just go up. It goes up because there are more buyers than sellers. The DJIA goes down for the opposite reason - more sellers than buyers. This buying and selling of fractional ownership of American Corporations also has an effect on the daily volume of shares traded on the NYSE. NYSE Volume rises during bull markets and falls during bear markets.
This article will present 109 years of market history to prove this point.
But first a little background on the charts.
My DJIA's BEV Plot complements the NYSE volume data extremely well. Each BEV data point is the result of the following formula:
This formula converts every new all-time high into a 0%, never more. Any data-point that is not a new all-time high becomes a negative percentage from its last all time high.
So a BEV Plot fixes the DJIA to a range of possible values between 0% to -100%. We lose all bull market action that is greater than the last bull's highs. That is unfortunate. But we see, with mathematical precision, all bear markets and corrections within bull markets. That's why this technique is called "The Bear's Eye View" or BEV Charting.
In the chart above, we can even see that the highs of 1909, missed taking out the highs of 1906 by only 2%. The DJIA in 1912 missed making new all-time highs by about 9%. The highs of 1906 stood firm until the start of WW1. This information is not so apparent when plotting the DJIA price data as published.
Now look at the NYSE's volume plot above. Our eyes are drawn to the high points, as they should. But I would also have you look at the empty yellow spaces between the zero volume line and the bottom of the blue NYSE Volume plot. Place a sheet of paper over the 1500K share & BEV -50% lines to block out the BEV Plot. By studying the bottom of the volume plot, as well as the tops, we see the complete picture of periods of high or low NYSE Volume.
Ignore the up and down spikes in volume. * Periods * of rising DJIA valuations occur during * periods * rising NYSE Volume. The same is true with falling periods of DJIA valuations. They occur with falling periods of NYSE Volume. These relationships are due to fickled human decision-making, not some eternal scientific law.
So the relationships between the plots of DJIA prices and NYSE Volumes are not precise mathematical relationships. Rather, we are observing recorded patterns of human behavior in the stock market as investors' emotions swung from greed to fear, and back to greed with occasional periods of indifference.
Let's look at the next chart from 1914 to 1923.
The horizontal black line is the BEV -40% line. I consider the -40% line the stepping off point of historic bear markets. There appears to be two -40% DJIA Bear Markets I've not included in my list. (published in previous articles) The -40% bear of 1914 was not included as the NYSE stopped trading from August to December 1914 & the DJIA was reconfigured. The 1917 bear was just shy of being a -40% bear. But note how it responded to the NYSE Volume.
I wanted to chart both the 1919/21 & 1929/32 -40% Bear Markets together, but I decided against it. The BEV Plot was up to it. However the expansion of the NYSE volume during the 1920s presented difficulties. So I broke the 1920s into two charts. (one above and one below)
Again, it is worthwhile to block the DJIA BEV plot and examine the bottom portion of the blue NYSE Volume plot in the chart above. It's very clear that rising volume is associated with rising DJIA Valuations. And falling NYSE Volume is associated with falling DJIA Valuations.
Let's move on to the Roaring 1920's. Below we see the 1920s' DJIA Bull Market and the Depressing 1930's Bear Market cycle.
Look at the DJIA BEV Plot from 1926 to 1929. What a bull market! Previous bull markets made BEV Zeros (new all time highs) for a year or less. But the Roaring 20s' DJIA actually started doing so in December 1924 and didn't stop until September 1929. That was almost 6 years of new all-time highs with almost no corrections. But then, the 1920s was the first time the Federal Reserve "injected liquidity" directly into the stock market. The 1920's Fed provided plenty of "liquidity" to stock speculators. We can see the effects of financial leverage as the NYSE Volume increases and decreases from 1925/65 below.
Heroin injections into a body, or Federal Reserve "liquidity injections" into a financial market, initiates a process of addiction. It starts slowly at first, but evolves into an all-consuming craving for more of what it now needs as the addict progresses from euphoria (1924-29) to overwhelming despair (1929-32). But the NYSE Volume didn't care why more people were buying than selling in the 1920s. Or why more people were selling than buying from 1929/32. It just expanded and contracted with the "liquidity" driven boom and bust of the time.
From its 1929 all-time high of 381.17, the DJIA on the first day of January 1932 had fallen to 74.62. This was below the BEV -80% line. Only 9 BEV percentage points to go to the bottom! But note: that was the drop from its all-time high. For anyone who purchased the DJIA at 74.62 in January 1932 would still see a loss of 53.11% when the DJIA hit bottom six months later at 41.22.
I've noted before how the best year in the history of the DJIA was from July 1932-33. The DJIA increased by 158% in only 12 months! In the chart below we see a better picture of this. The BEV Plot starts on 02 January 1932 at a value of 74.62.
So, after 845 days of bone-grinding, bear market declines, how was anyone to know it was safe to come back into the market after 08 July 1932 with the DJIA at 41.22 but not on 02 Jan 1932 with the DJIA at 74.62? With the 100% certainty of 20/20 hindsight, we see above that after the 1929/32 Bear Market's low of July 1932, significant increases in daily NYSE Volume brought sustainably higher DJIA prices.
So from 1900 to 1933, trends in NYSE Volume were key to DJIA price trends.
The same was true from 1932 to the 1942 -40% DJIA Bear Market. And even from 1932 to 1966!
Do you see any -40% Bear Markets from 1943 to 1966? Not with NYSE Volume expanding like this! So let's move on to the next DJIA -40% Bear after 1942: the 1973/74 DJIA Bear.
The huge increase in NYSE Volume had flattened out by 1968. There was a DJIA -30% Bear as volume went flat in 1970. The DJIA -40% Bear occurred as NYSE Volume became lackluster. Volume picked up nicely in 1975, but failed to carry the DJIA to a new time high in 1976-77.
Remember, this is not a science. The 1000 DJIA was a real psychological barrier for investors from 1966 to 1981. When the DJIA approached 1000, people sold their positions because that was what people did from 1966 to 1981. They could not believe the DJIA at 1000 would hold. We see much the same today with 1000 gold.
After the NYSE Volume stopped swelling in 1966, the stock market was ranged-bound for years. But that was to change in the early 1980's, as we see in the chart below.
The chart below does not show the DJIA (Red Plot) in a BEV plot. There is no need as the DJIA attempted, but failed five times (from 1966 to 1981) to hold above the 1000 line. In 1982, it tried for the sixth time, and succeeded. But look at the 1982 explosion in NYSE Volume!
Increased volume is a response to increased money flows coming into the stock market. Where did this new money come from? The Federal Reserve.
So, from January 1900 to January 2000, a hundred years period, we see that for significant periods of times, the valuation of the DJIA and NYSE Volume were in synch with each other. This was obviously true: until now.
From January 1990-2000, everything is as we should expect from a hundred years of market history: a roaring DJIA Bull Market on expanding NYSE Volume. But as I've noted before about market rules; just when you think you've figured out the rules, someone changes them.
When market norms of 100 years are so obviously violated for a 9 year period, there must be a reason. I believe we are observing forensic evidence of the most massive price manipulation scheme in history. Price discovery, linked to economic reality, has been pushed aside by vain politicians whose only desire is to maintain their power and privileged positions in society.
Academics, who found their ivory towers too small for their egos, were more than willing to prostitute themselves for the power and privilege Washington offered. Social scientists, provided "policy" the moral justifications for the morally unjustifiable: debasing the world's reserve currency so that members of the US Congress would have the means to purchase popularity with their home districts at the expense of the global economy.
Witness how Dr. Benjamin Bernanke (Princeton University) purchased the toxic waste of Washington's sub-prime fiasco via the inflation of trillions of new dollars, and then called it "economic stimulus." President Obama's chief economic advisor, Lawrence Summers (Harvard University) is no better.
When this house of cards comes tumbling down, watch these Masters of Disaster in the House & Senate Financial Committees and "leading economists" avoid any personal responsibility for what they have done to the world.
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.