The more I think about it, the more I can see parallels between this market and the one of the fourth quarter of 1998. The similarities are many. In the summer of 1998 the market experienced its shortest bear market on records, falling some 22% over 2-month period before bottoming in September and then taking off again to the upside in October.

Why is the fourth quarter of '98 similar in many ways to the fourth quarter (to date) of 2004? Consider:

• The S&P 500 index began falling in July 1998 from the 1200 area all the way down to the 950 area. It commenced a rally in October of that same year which took the index back above its 30/60/90-day moving averages and back to nearly the benchmark 1200 level before consolidating in early December and then taking off again around the middle of the month and into the New Year.



• It was the 8-year cycle that produced the major bottom and recovery rally in October 1998 and well into 1999. This time around it was the 10-year cycle that bottomed in October of this year and has so far taken us up to higher highs for the year in the S&P 500 and NASDAQ Composite indices. Is it a coincidence that once again the 1200 area has become pivotal in the S&P index?



• As in late '98, so too this year the 30/60/90-day moving averages in the S&P 500 have already harmonized nicely on the upside and should produce a continuation of this rally into at least the first half of 2005. You'll recall in a previous article our discussion of the 30/60/90s and how they've been responsible for the momentum bull market in the XAU from August-to-date. We now see a similar unfolding of the 30/60/90-day MA in the S&P and the results should be no less spectacular.



• As the market rally of late '98 quickly led to oversold readings in most technical and sentiment-based indicators, so it has also the case so far this fall. Simply put, momentum markets begin from oversold levels and then quickly develop into overbought levels before "correcting" along the way and coming back into line. The hallmark of a true momentum market is a rising and harmonized 30/60/90-day moving average series, which we have in the NASDAQ and in the S&P (notwithstanding immediate-term pullbacks along the way). Now even the Dow 30 index has signaled a bullish crossover in its 30/60/90-day moving averages and should soon catch up with the S&P and NASDAQ. (To date, the Dow has yet to make a new high for the year while the S&P and NASDAQ have already done so).



• The bears remained steadfastly bearish on the stock market even after the rally was underway in late '98 and many stubbornly remained bearish well into 1999 before turning bullish near the top of the rally that year. This pattern appears to be repeating itself to date this year. Consider these mass mailing solicitations from newsletter publishers in recent weeks: "Huge Crash Near?", "The Great Multi-Year Bear Market in Stocks That Will Last for Years!", "Urgent Warnings: The Total Destruction of the U.S. Housing Market is Coming...", "Stocks are falling. The U.S. economy is teetering on the brink.", "Forget the Great Depression and get ready for...The Greatest Depression." With this much of a super-bearish psychological backdrop, a stock market crash is but a distant memory now and that all-important "wall of worry" that the market so loves to climb has been firmly established.

Make no mistake about it, the psychological backdrop alone is sufficient to compare this market with the one of late 1998 and heading into 1999. While the cyclical and fundamental factors of that time period are somewhat different than that of today (i.e., history never repeats in *exactly* the same), there are certainly enough similarities to make the comparison a valid one.

The latest headline in the Financial Times newspaper makes the following statement: "Fears over recovery as Wal-Mart sales stall." It's actually good news when the word "fear" shows up on the front page of the newspapers, for it practically guarantees a solid footing for the stock market and overall economy.

Check out the above chart of the Dow 30 index year-to-date. It shows a potentially bullish inverse head-and-shoulders pattern with a lateral "neckline" resistance at about 10,800. I believe we'll see the Dow breakout above this level before the end of the year and the Dow could actually be the leader among the major indices heading into early 2005. One reason for this is that the Dow 30 stocks have collectively seen a rise (yet again) in their rolling earnings-per-share (EPS) line. This has been partly because of the weakness in the U.S. dollar as it has actually helped the old-line manufacturing companies that help make up the Dow 30. Whatever the reason, an upward trend in EPS while prices has been mostly lateral for the balance of the year is a bullish fundamental backdrop. Sooner or later the Dow will respond favorably to this rising EPS trend.

Now to keep the big picture in perspective (and to keep us from getting too bearish when we should be focused on the positives) I'm excerpting a comment made by Tony Crescenzi in the Miller Tabak Market Watch letter (331 Madison Ave., New York, N.Y. 10017). He writes, "Over the past three months, commercial and industrial loans have increased at a roughly 14% annual rate, a substantial increase compared to the high single-digit declines seen in 2001 and 2003. C&I loans now look set to post their first calendar-year increase since 2000. In the latest week, C&I loans increased a sharp $5.4 billion to $901.6 billion, reaching their highest level since September 2003. The money will take time to find its way into the economy; it won't get spent in a day, increasing the likelihood of continued economic expansion.

"The recent increase in C&I loans is partly the result of looser credit standards at the nation's banks, but it is mostly the result of a surge in demand for credit."

There you have it, an affirmation of the same message I've repeated all through this year, namely, that the 10-month consolidation/correction this year was a product of the 10-year cycle bottoming along with the rate of change contraction in the money supply from 2003. But with the bottom of the 10-year cycle and the rate of change increase in the money supply earlier this year now beginning to hit the financial market and economy, it's only a matter of time for the economy to show signs of major improvement compared to earlier this year. Here is yet another reason why the financial system is likely to become re-liquified in the months ahead. Bottom line: Stay bullish!

December 2, 2004

Clif Droke is the editor of the daily Durban Deep/XAU Report and is the author of nearly 20 books on technical analysis and the financial markets. His latest book is "Channel Buster! (How to trade the most profitable chart pattern). Visit his web site, www.clifdroke.com, for free samples of his work.