A Brief Market Update
Review Of The Bull/Bear Market Relationship
Tim WoodFrom a Dow theory perspective, my long-term views have never changed. The primary bearish trend change that occurred last August in conjunction with the decline into the October low remains intact. In the wake of that decline I said here that the advance out of the October low was expected to carry the market above the May 2011 high and it did. In the process, a Dow theory upside non-confirmation was born, in that the Transports failed to better their July 2011 secondary high point, while the Industrials did. More recently, we also have a short-term non-confirmation that was formed as a result of the Industrials bettering their March secondary high point while the Transports failed to better their corresponding February secondary high point. This now leaves us with a non-confirmation of two degrees and an ongoing bearish primary trend change that has been in force since August 2011.
Many may ask how we could see a move above the May 2011 high and the bearish primary trend change still be valid. It's simple. That move was not confirmed by both averages with a joint move above the previous secondary high points. Therefore, according to Dow theory, the previously established trend change remained in force. History shows that other Dow theory trend changes have been followed by similar behavior. In some cases this still occurred at tops as was the case in association with the 2000 and 2007 tops. In other cases, the non-confirmation was corrected and the market continued on its path.
That said and as I have written here before, not all Dow theory trend changes are created equally and the key I have found in determining their validity are the statistical based DNA Markers, which are not a part of Dow theory. As an example, it was these statistical based DNA Markers that allowed me to make the call last year for the move above the May 2011 high in spite of the primary bearish trend change and bearish sentiment levels not seen since 2008. Therefore, within the overall Dow theory back drop, it will be these developments that we will be monitoring closely for guidance and which are covered in my research letters. Ultimately, the DNA Markers that have been seen at every major top since 1896 should present themselves and when they do the stage will be set for the Phase II decline of the much longer-term secular bear market that began at the 2007 all time high. The decline into the Phase II low should prove to be a financial train wreck to say the least, as the same deflationary forces seen in 2008 and into early 2009 should again be felt in association with the Phase II decline. Yes, this should include commodities, including gold, which I began telling my subscribers about way back in February when the markers first appeared on that front. Also, history tells us that the Phase II declines tend to be far worse than the Phase I declines. Therefore, this in turn suggests that this time around, once this setup begins to unravel, any efforts by the powers that be are apt to be futile. The fine folks at "CNBS" did not see or understand what was occurring in conjunction with the 2000 top and what was setting up to follow. They did not see and understand what was occurring at the 2007 top, nor with housing in 2005 nor with commodities in 2008. They do not understand what is occurring now and even if they did they could not tell you.
Now, with this all said, it's been a while since I discussed my long-term views and I've received questions asking if that view has changed. So, let's get back to the big picture.
When studying the bull and bear markets of the late 1800's and very early 1900's, from a Dow theory perspective and which Dow, Hamilton and Rhea wrote about, I realized that they are one and the same as the upward and downward movements of the 4-year cycle. In other words, the upside portion of a 4-year cycle was the same thing as a bull market, in accordance with Dow theory, and the downside portion of the 4-year cycles were the same as the bear markets in accordance with Dow theory.
But, beginning in 1921, these bull and bear market periods began to grow in duration. I feel that this is a direct result of the growth in population. As our country grew, more and more people began investing and as a result, the bull and bear periods became longer. In turn, bull and bear markets evolved into a series of multiple 4-year cycle events. For example, the first bull market to consist of multiple 4-year cycles ran from 1921 to 1929 and consisted of two 4-year cycles. The low in November 1929 was a 4-year cycle low. The rally, or "Secondary Reaction," as it would be termed, in accordance with Dow theory, that followed was the upside portion of a 4-year cycle that topped in only 5 months. Once this "Secondary Reaction" was over, the DJIA moved down below the previous 4-year cycle low and into the 1932 4-year cycle low, which proved to be the bear market bottom. I would also like to point out that the 1921 to 1929 bull market advanced a total of some 500% from the 1921 4-year cycle low at 63 on the DJIA to the 1929 4-year cycle top at a high of 381.
The next great bull market began with the 4-year cycle low in 1942 and ran to the 4-year cycle top in 1966. This time the "Primary" bull market was comprised of a series of six 4-year cycles and advanced a total of 976% from the 1942 4-year cycle low at 93 on the DJIA to the 1966 4-year cycle top at a high of 1,001 on the DJIA. Note that in percentage terms of the advance, this bull market advance was roughly double the preceding great bull market of the 1920's. The bear market that followed was also a series of 4-year cycles. From the 1966 4-year cycle top, the bear market moved down into the 1974 bear market low. This time it was a series of two 4-year cycles.
Now, let's focus on the bear market declines. Prior to the first great bull market that ran between 1921 and 1929, the bear markets averaged some one-third the duration of the previous bull market. This relationship has also held true with the extended bull market periods as well. For example, the 1921 to 1929 bull market was 8 years in duration and the 1929 to 1932 bear market was 3 years, making the bear market duration 37.5% of the preceding bull market. The 1942 to 1966 bull market was 24 years in duration and the 1966 to 1974 bear market was 8 years, which was 33.3% of the duration of the preceding bull market.
From both a cyclical and a Dow theory perspective, the last and greatest bull market of all time began with the 1974 4-year cycle low. Some say that it began at the 1982 low, but in reality, that is when the new bull market became obvious. The low occurred in 1974 and Richard Russell called that low at the time using Dow theory. The bull market that began in 1974 carried price up into the 2007 top, which was a period of 33 years and consisted of a series of eight 4-year cycles with a total advance of 2,390%. Note that once again this bull market advance more than doubled the magnitude of the preceding bull market advance, which is also another consistency.
If we apply the normal bull/bear relationship of approximately one-third, then given that the last great bull market ran some 33 years, this bear market should last until somewhere late in this decade. I will add to that, the more they monkey around with the natural forces of the market, the longer they are apt to drag things out and the worse it will be. Because the 2009 low occurred only 17 months after the 2007 top, that low falls far short of the normal one-third relationship that has historically been seen. Therefore, based on these historical relationships I do not believe that the bear market bottom was seen at the 2009 low.
Also, according to Dow theory, each bull and bear market period has three separate phases. This phasing is an important aspect of the Dow theory that is most often over looked. The 1966 to 1974 period is a perfect example of a bear market, its three phases and the rallies separating each of the phases. Therefore, I will use that chart to illustrate this concept.
Referring to the chart above, Phase I of the second great bear market began at the top in February 1966. This top was confirmed by Dow theory in May 1966. From this top the market declined into the Phase I low in October 1966. This Phase I decline is marked in blue on the chart above and it carried the market down some 25%. From this Phase I low the typical rally that serves to separate Phase I from Phase II began. This rally carried the market up some 26 months and is marked in green on the chart above. During this 26 month advance you can see that there were a couple of false breakdowns that the market was able to recover from and inevitably pushed higher. In fact, with the advance into 1968 bettering the 1967 secondary high points, a traditional Dow theory bullish trend change even occurred.
But, those who truly understood Dow theory phasing understood that this was a bear market rally separating Phase I from Phase II of a much longer-term bear market and not a new bull market. In spite of the false breaks, the bullish sentiment, false recoveries, claims of new bull markets and the endless confusion and frustration, the Dow theory phasing prevailed and the decline into the Phase II low carried the market down some 36% to new lows over a 17 month period. However, the decline into the Phase II low did not begin until after the DNA Markers that have been seen at every major top since 1896 were in place and it is these same DNA Markers that remain key. This Phase II decline is marked in red on the chart above.
Based on my longer-term studies, we appear to have a similar situation today. I believe that the rally out of the March 2009 low is the rally that will ultimately separate Phase I from Phase II of this long-term secular bear market and that it is synonymous with the rally into 1968. However, because the preceding bull market was longer in duration, the bear market that follows will also be longer as will each phase and the rallies separating each of these phases. Currently, the period since the summer of 2011 has been a recipe for frustration and uncertainty much like that seen during the false break and sideways action in the late 1967 and into the mid 1968 timeframe.
It is because the setup at the May 2011 high was incomplete that the evidence suggested the break into the October lows was a false break. The price action that has followed the October low has proven that the October low marked a secondary low point in accordance with Dow theory and it is the DNA Markers that are key. These DNA Markers did appear at the 1968 top and have also been seen at every other major top in stock market history. This time should be no different and the details of these DNA Markers are covered in the monthly research letters. Until such time as this setup materializes, the illusion that the worst is behind us will prevail as will the state of confusion and frustration.
28 June 2012
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