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July 18, 2009

New Bull Market?
by Tim Wood

In the wake of the price action seen this past week I have received numerous e-mails asking if this means a "New Bull Market" has begun. The answer is, No! Now, this is not to say or to try to deny the positive price action seen this past week. Fact is, based on the chain of events that have followed the June high, I did not expect the July 1st high to be bettered. However, the price action on Wednesday did in fact better the July 1st high and structurally, this was an obvious positive short-term development. The price action this past week also potentially has intermediate-term implications as well. But, this does not mean that a "New Bull Market" has begun. At best, this simply means that the counter-trend bear market rally that began at the March 2009 low may not have run its course.

I received a phone call yesterday in which the caller heavily implied that THE bear market bottom had been made. For those who feel this may be the case, I want to offer you a stand back and "look at the forest" point of view on this.

Obviously, the definitions of Bull and Bear markets differ from person to person. My definition is based on the works of the great Dow theorists, Charles H. Dow, William Peter Hamilton and Robert Rhea. As a result of my study of Dow theory combined with my study of cycles, which are not a part of Dow theory, I have drawn some very obvious conclusions about the nature of Bull and Bear markets.

As I read about the bull and bear markets of the late 1800's and very early 1900's, it becomes apparent that the bull markets Dow, Hamilton and Rhea wrote about were the upward movements of the 4-year cycle and the bear markets were the downward movements of the 4-year cycle. As our country grew, more and more people began investing and the bull and bear periods became longer in duration. As a result, bull and bear markets evolved into a series of multiple 4-year cycle periods. 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," 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. I would also like to point out that the 1921 to 1929 bull market advanced a total of 568% from the 1921 4-year cycle low at 67 on the DJIA to the 1929 4-year cycle top at a high of 381 on the DJIA.

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 1,076% 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 this bull market advance was roughly double the preceding great bull market. 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 was a series of two 4-year cycles.

Now, I want to 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 a cyclical 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 and I understand that argument. However, from a cyclical perspective the bull market began in 1974 and this was the actual low point of the 1966 to 1974 bear market. 1982 was when the bull market broke out and became apparent.

At the 2000 top, the associated Dow theory non-confirmation and confirmed primary trend change indicated at the time that this great bull market era had ended. Upon the primary trend confirmation in March 2000, all indications, according to Dow theory phasing, was that Phase I of a great bear market had begun. Also, based upon the historical relationships between bull and bear markets that bear market was slated to run into the 2008 to 2010 timeframe, which was 33 to 37% of the preceding bull market. Again, when the rally out of the 2002 low began it appeared that this was simply the rally separating Phase I from Phase II of the bear market.

However, the powers that be threw everything they had at the market and in doing so they allowed the bear to claw its way out of existence and when both averages managed to better their 2000 highs, everything changed in accordance with Dow theory phasing. I said at that time "I can tell you that this confirmation does not signal a "new" bull market, but rather reconfirms the existing bull market." What I was saying here at that time was that the bull market that began in 1974 was reconfirmed as still being intact when both averages jointly bettered their 2000 highs and that we had never entered into a true secular bear market that served to correct the 1974 to 2000 bull market period.

Anyway, the advance that followed this reconfirmation carried the averages up into their last joint high, which occurred in July 2007, and can be seen in the Dow theory chart below. From the July 2007 joint high the averages moved down into their August 2007 secondary low points. It was then from that secondary low point that things began to, once again, deteriorate. As you can see in the chart below, the Industrials moved on to new highs while the Transports failed to confirm. This non-confirmation is noted in blue.

It was this non-confirmation that lead to the November 2007 decline and with the break below the August 2007 secondary low points, noted in green, on November 21, 2007 the Primary trend was once again confirmed as being bearish. As of the October 2007 high the bull market advance that began in 1974 has now run 33 years and has consisted of eight 4-year cycles with a total advance of 2,385%. Note that this advance has been roughly double the previous bull market advance in terms of the percentage move out of the low in which the bull market began. Now the question seems to be, did the March 2009 low mark THE bear market low?

I can tell you that since 1896 secular bear markets have historically averaged some one-third the duration of the previous secular bull markets. I don't think there is anyone that will now dispute me on the fact that the October 2007 high marked THE top of a secular bull market. With the bull market having run some 33 years in duration, a typical bear market relationship suggests that the secular bear market should last some 10 to 12 years, not a mere 17 months as would be the case if the March 2009 bottom marked THE bear market bottom.

So, short-term, sure the price action this past week was very positive. Intermediate-term, there were also potentially some positive developments, which I'm currently monitoring and will be reporting in my short-term updates and newsletter as things evolve. At best, these developments simply mean that the bear market advance out of the March low has not yet run its course. But, longer-term, " A New Bull Market," I don't think so. Have housing prices bottomed? Are foreclosures not still at or near all time highs? Is the consumer still not drowning in debt? Are bankruptcies still not high? Have unemployment levels come down? Is the small business owner still struggling? Are layoffs still not continuing? Are car sales still in the toilet? Are the powers that be still worried about the economy? Did the rally this past week solve your financial issues? I could go on and on, but I think you get the point. The optimism about this week is high and I understand that. Hey, depending on what happens with my intermediate-term Cycle Turn Indicator, we could see this rally still run further as the advance out of the March low could continue. But, when we back up a look at the big picture, nothing has changed. We are indeed still operating within the worst financial crises this country, if not the world, has ever seen and the Fed's efforts over the past year or so have not solved the problem. You have been Warned!

I have begun doing free Friday market commentary that is available at www.cyclesman.info/Articles.htm so please begin joining me there. The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. In the July issue I cover the statistical implications for commodities, gold and the current cyclical and statistical implications for the current advance in the stock market. A subscription also includes a very detailed slide show presentation on the big picture in equities, the 4-year cycle, commodities and what is expected to come. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

Tim W. Wood
Cyclesman.com

Copyright © 2004-2010 by Tim W. Wood. All rights reserved.

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