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Primary Bear Market

February 9, 2004

The following monthly chart of the Dow Jones Industrial Index is very informative if one focuses on "volume" in addition to price. (Source:

In general terms, Technical Analysts look for rising volume to accompany rising prices in a Primary Bull Market (buying pressure) and falling volume to accompany falling prices during secondary technical reaction down moves within a Primary Bull Market - when prices sag as a result of a withdrawal of buyers.

The chart below has been screaming warning signals that all is not well:

First, note how volume rose dramatically between 2000 and 2002 even as prices fell - validating the commencement of a Primary BEAR market when "selling pressure" was seen to be causing the falling prices.

Next, and more importantly, note how the steep rise in prices since early 2003 has been accompanied by FALLING volumes - a clear indication that prices have been "floating" upwards in this secondary technical upward movement of prices within the continuing Primary Bear Market; as sellers withdrew.

Note also how the monthly On-Balance Volume chart seems to have stopped just short of its 2002 high even as the Dow's price appears to have hit a possible "Double Top" - at the same level reached when the OBV hit its maximum upside.

(Note: Monthly and weekly OBV charts are not particularly reliable because they ignore intra month and intra week movements and are open to manipulation at month and week ends. Nevertheless, they are useful for background corroboration)

The $64,000 question is therefore: "Is the DJIA chart reflecting a double top at around the 10,750 mark?" If so, it is conceivable that we could be about to enter the second, grinding - and wealth destroying leg - of the Primary Bear Market.

In a previous essay dated May 24th 2003 - entitled "Indian Summer Revisited" ( a bottom in the Nasdaq was called, and it was postulated that the reason to anticipate rising equity prices from that point forward was that the politicians would be moving to manipulate the economic environment.

The primary rationale for now expecting the markets to top out (and why I am now looking for technical reasons to corroborate this) is that at that time, the Indian Summer argument was regarded as "flaky" whilst now it being generally embraced.

But "generally accepted" is not a sufficient argument. We need technical evidence from the markets themselves.

So, the question is: What are the markets saying regarding the probability that the DJIA has seen a double top at around 10,750?

First, lets ratchet up to look at the weekly chart of the DJIA over the past three years:

The market top at around 10,750 is clearly visible in March 2002, and gently falling trendline in volume is also clearly visible with its starting (peak) date in around July 2002 when market prices bottomed out at around 7,500 on heavy volume.

Note how the successive bars depicting volume have been reaching lower and lower peaks even as the price has been rising since March 2003.

Now that we have "validated" (via volume patterns) that we have in fact been experiencing a technical upward reaction within in an ongoing "Primary Bear Market" - as opposed witnessing the re-emergence of a Primary Bull Market - one of the most important conclusions we can draw is:

Ignore all buy signals from so called "oscillator indicators".

In a Bear Market only "sell signals" from these indicators can be trusted. In a Bear Market, oscillators can remain in oversold territory for long periods of time.

So what do we look for?

In short, we look for "internal weakness" in the markets.

  • Are there any non-confirming indicators?
  • Are there any other signs of imbalances creeping in?

One non confirming indicator is to be found in Dow Theory (Charts courtesy; and the sum total of my knowledge in this area courtesy of 35 years of Mr Richard Russell's wisdom)

Two very important clues are forthcoming from the above weekly charts:

  1. Whilst the DJIA is a bit "iffy" about whether or not the "Double Top" will lead to a reversal, the Transports are more certain. Note how the falling Transport Index has already penetrated a rising trendline on the downside following its having reached (and turned down from) its own Double Top.
  2. The Utilities have been much weaker, and have not even reached the level where they were in May 2002.

Next, it is important to look at Advance/Decline lines, but here I would prefer to look at the NYSE as a whole with the objective of avoiding any mistakes that could arise from the small sample of 30 stocks that are contained in the Dow:

Of interest here is that even whilst the first leg of the Primary Bear Market was in full force, more shares were rising than were falling indicating a "stubborn" bullishness of the investing public - and there is as yet no sign of any internal market weakness in this specific area. ie The investing Public is still stubbornly bullish.

The A/D volume line may even be argued to be more bullish than bearish in that it has reached a higher high than in May 2002.

Nevertheless, another very loud warning bell is being rung by the chart below - which shows (on a long term basis) the percentage of shares trading above their long term Moving Averages:

The % line peaked out at well over 90% in January, and this was CLEARLY an exaggerated level when look at in historical terms.

More importantly, the reader's attention is drawn to the "Time Line". Note how, during the Primary Bull Market, the index was in 80% territory for more time than it was in 20% territory BUT, since 1999, the proportion of time has flipped over - with more in the 20% territory and less in the 80% territory.

That the recent move to over 90% was NOT a sign of the re-emergence of a Primary Bull Market flows from what is clearly emotional behaviour: With the S&P Price Earnings Ratio standing at 29.29X in January 2004, the >90% level can only be seen as "emotionally" driven as opposed to rationally driven.

The problem is: With the % of stocks above their long term MA's being in the 90% area, historical evidence suggests that this ratio has nowhere to go but "down" (It tends not to hover around at the extreme levels).

Further, if the ratio does turn down, this can only be accompanied by falling levels of the equity Indices (DJIA and S&P).

Further, if the Indices start to fall from this level, the rising (Secondary) trendlines which have characterised the Secondary Up-leg in equity prices will - with virtual certainty - be penetrated on the downside.

Finally, the Point and Figure Chart of the DJIA is giving a "Sell" signal as can be seen from the following chart below (Courtesy - indicating an anticipated pullback from the peak at 10,700.

The question of "How far can the markets fall from here?" is answered by the above chart of the S&P Index relative to "Normal" P/E range. The answer is: If rationality returns to the equity market, the S&P could fall anywhere between 33% and 67%.

Another sign that the markets have been behaving emotionally can be found in the following chart - which is ALSO displaying signs of reaching a Double Top.

That it is virtually certain that the Russel 2000 will not penetrate the double top in the near future flows from the position of the PMO Oscillator, which is also showing signs of a Double Top, and which is flattening, and perilously close to giving a sell signal.

If the markets crack, and investors start to bail out, where will the money go?

Well, the downtrend line of the yield on 30 year treasuries is still intact, as can be seen from the following chart, and the PMO has recently given a "sell" signal (actually a buy signal in the "price" of the Treasury Bills).

It therefore seems reasonable to anticipate a "rush" of cash into Treasuries - which raises a VERY important question regarding the likely impact on Velocity of money, as raised in last week's essay.

Will money "rush" into Precious Metals and Commodities?

Well, there is the issue of Deflation vs Inflation. If Velocity of money slows, then the threat of inflation is less than the threat of deflation.

The PMO Oscillator below is clearly pointing to an overbought gold price (on the weekly chars) BUT, I would draw the readers attention to the unreliability of oscillator sell signals if the signal is within the context of a Primary Bull Trend (which is what Gold Appears to be in flowing from an examination of the ultra long term charts - see below, courtesy Gold-Eagle)

Of course, there is a question regarding whether the Gold Price itself has hit a Double Top (within the context of its having completed the first leg of its Primary Up-move), but I am not yet ready to make a call here. To me, at any price above $375/ounce will leave the Primary Trend intact. We might even see some sideways movement for some time as the overbought oscillator works its way through, but I am inclined to believe that ALL markets will overreact when it is finally acknowledged that the secondary Up-leg in the Primary Bear Market in equities has given way to a renewed down move.

What are Commodity Prices doing?

Again, the (possible) Double Top - but note how the PMO oscillator is far below the historical high of 10.

What will be the likely impact on currencies?

The following two charts show that there is room for a further fall in the US Dollar, and for a further rise in the Euro. Note that the PMO of the USD can remain in oversold territory (it does not have to rise if the USD is in a Primary Bear Trend), and a continuing low oscillator could imply a falling dollar.

This situation "could" be mirrored by a rising Euro with its Oscillator continuing to rise, but I am focussing on rising bottoms of the USD's PMO oscillator and falling tops of the Euro's PMO oscillator, and a more comfortable outcome might be a predominantly sideways movement in both of these. (Note that a fall in the DJIA is unlikely to be in a vacuum, and if overseas markets also start to look vulnerable there may not be any "wild" swings in the currencies.

Overall Conclusions

  • The balance of probabilities favours the conclusion that the Primary Bear Market in equities is about to enter its next down leg
  • Investor Money realised from the sale of equities seems likely to gravitate into Treasury Bonds - with long term yields poised to continue downwards
  • This raises a question regarding the velocity of money, and whether we are about to enter a period of falling prices in general. The markets are not yet signalling this as a likely outcome here (although falling yields are unlikely to be accompanied by inflation).
  • Further, there does not appear to be any chart evidence that we are facing a possible "panic" in the currency markets - which might even hold some surprises and, with the Precious Metals in clear Primary Up-Trends, it seems sensible to remain invested in Precious Metals - in particular silver, which has some structural imbalances in its market.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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