By Tim Wood
Since the March 6th intra-day low at 6,469.95 the Dow Jones Industrials have advanced 32.79% into their recent high at 8,587.55. The Transports bottomed on March 9th at 2,134.21 and have advanced 59.70% into their recent intra-day high at 3,408.28. During this time the S&P 500 has advanced 37.9% and the Nasdaq 100 also advanced some 37.9% into its recent highs. Then, there is the CRB Index which is up some 20% from its February lows and crude oil, which is now up from its February low some 68%. Yippee! Obama has saved the world. The job numbers were better than expected. The bear market has ended and the economy is now on its way to recovery.
NO!!! What we are seeing is a bear market rally. The Obama team thinks their efforts are beginning to save the world and the general public is being lulled to sleep thinking that the worst is behind us. This is Not the case. I told my subscribers that there were higher degree cycle lows expected in March and from a Dow theory perspective I anticipated this to coincide with secondary low points. Regardless of what label we put on the March lows, the rally continues and the longer it does, the more false confidence it will foster.
Robert Rhea, the great Dow theorist of the 1930’s wrote: “It is almost certain that a panic rebound will recover 40 percent or more of the preceding decline.” Mr. Rhea goes on to say “Whenever a panic decline occurs, the market thereafter seems to need a resting period during which it appraises the damage to its structure. Prices frequently back and fill for several months in such areas. The action somewhat resembles that of a pendulum which, oscillating slowly as it seeks equilibrium, gradually comes to rest. The direction taken after equilibrium is attained is generally significant.”
William Peter Hamilton, who began working with Charles H. Dow in 1899 and carried the Dow theory torch until his death in 1929, wrote: “What it (Dow’s theory) predicts is absolutely nothing. It says that the wind is blowing up or down the financial hill, not how long it will blow….”
Based on my work, I believe that we are seeing a “resting period” just as Mr. Rhea talked about and that the market is appraising the damage to its structure. While the Dow theory does not tell us how long the bear market is apt to last, when I look at the structural/technical damage that has been done from a cyclical perspective, which has absolutely nothing to do with Dow theory, it tells me that this bear market is not over and that we are merely seeing a bear market rally.
It has been a while since I’ve written about this here, but when I look at the traditional secular bull and bear market relationships of the past, this too tells me that this secular bear market is not over. Here’s why. The Bull and Bear markets of the late 1800’s and very early 1900’s that Mr. Dow and Hamilton wrote about were one and the same as the upward and downward movements of a single 4-year cycle. As our country grew and more people were drawn to the market place, the Bull and Bear market periods became longer. Bull and Bear markets evolved from being single 4-year cycle events into a series of multiple 4-year cycle periods. This historical relationship can be used to help us gain an expectation as to when this bear market may be over.
For example, the Bull market from 1921 to 1929 was the first secular bull market to consist of two 4-year cycles. The low in November 1929 was a 4-year cycle low. The rally, “Secondary Reaction,” that followed was the upside 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. In this case, the bear market consisted of a single 4-year cycle, which was another first in history. Also, in spite of the fact that this bull and bear market was the first in history to consist of multiple 4-year cycles, the bear market decline into 1932 still measured in at 37.5% of the duration of the preceding bull market, which was consistent with previous bear markets.
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, over a 24 year period. The Bear market that followed also grew to be a series of two 4-year cycles making the bear market that followed an 8 year affair with a duration of 33% of the preceding bull market.
As I see it, the last great Bull market began at the 1974 low and ran into the 2007 high, which was a period of 33 years. Some may argue that the bull market began at the 1982 low, but the actual price low occurred in 1974 so I prefer to use that point. But, if we measure from the 1982 low the bull market was still 25 years in duration. If the historical relationships with the bear market running approximately one-third the duration of the preceding bull market is to hold this time around, then the bear market would be expected to run some 8 to 11 years depending on where you want to begin your count. In either case with us just now in the 19th month since the October 2007 top it should be obvious by this measure that the bear market is likely not over.
Also, another historical marker of secular bear markets, as expressed by Richard Russell, is value. Historically, the dividend yield will be roughly equal to the price earnings ratio at secular bear market bottoms. I have used the S&P data here because I did not have this data as far back on the Industrials. At the 1932 bear market bottom the yield was 10.50% and the P/E was just under 10. At the 1942 bear market bottom the yield was 8.71% and the P/E was 7.3. At the next great bear market bottom in 1974 the yield was 5.9% and with a P/E of 7.24. If we take this same reading at the 1982 low the yield was 6.2% and the P/E was 6.9. Presently, the yield on the S&P is at 2.62 and the P/E sits at 58.97. Yeah, I know that many of the analysts show the P/E on the S&P to be in the 20 to 21 range. That is bogus. Those numbers are based on the so-called “operating price earnings.” The P/E based on Generally Accepted Accounting Principles is 58.97 and that is the same measure as has been used throughout history. The so-called operating price earnings is a measure that became popular in the 1990’s as we moved into the George Orwellian socialist society of today. In any event, based on the real P/E as is represented by GAAP it is safe to say that the P/E and the dividend yield are no where near par and as a result this data also suggests that the March low was NOT the bear market bottom.
So, whether I look at the statistical data, the cyclical data, the historical relationships between bull and bear markets or the historical measures of value as have been seen at every secular bear market, the data all points to the same conclusion. The bear market is not over. Obama and rest of the Hee Haw gang have not saved the market. This is a bear market rally and the longer it lasts the more people it will ultimately suck in and crush in the end. That is, after all, what bear markets do. The key in my eyes are the statistics, Dow theory confirmations and the cyclical structure of the market and more importantly my Cycle Turn Indicator, which not only guided me beautifully down into the March 2009 low, but also identified the March 2009 low. Until it turns down, this counter-trend rally will remain intact and higher prices will remain possible.
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