Dow Theory Update
At the time of my late March article that was posted here, there was a short-term Dow theory non-confirmation at play. I explained that this non-confirmation had drawn less attention than the one that had occurred earlier in March, but that these non-confirmations only served as warnings and that it was what developed from that point that was most important. Since that time, the latest short-term non-confirmation has again been corrected. So, my point here is that just as I originally stated in the mid-March article, non-confirmations in and of themselves are only warnings and should never be construed as a death sentence to the market. The latest Dow theory chart can be found below and as of this writing we no longer have a Dow theory non-confirmation.
In looking at many of the technical indicators and even some of the cycles work, the advance out of the February lows has become overbought and is due at least a short-term correction. In my work, the key to that correction is the down turn of my Cycle Turn Indicators on both a short and intermediate-term basis. Until my intermediate-term CTI turns down, the advance out of the February intermediate-term low will continue to remain intact and the chance of a more meaningful correction is limited. Now, should another Dow theory non-confirmation occur that is followed by a downturn of my intermediate-term CTI, then at that time any such non-confirmation would begin to carry some weight. In the meantime, yes, this advance is overbought and due for a correction, but for now, the bear market rally lives on.
In addition, I also want to once again stress that the orthodox Dow theory primary bullish trend change that occurred in conjunction with the advance out of the March 2009 low still remains intact. However, it is very important to understand that this bullish primary trend change continues to operate within the context of a much longer-term secular bear market in accordance with Dow theory phasing and it is for that reason in part that I continue to say that this is a bear market rally.
I have been asked by some of the readers here why I continue to say that this is bear market rally. In the late March article, I discussed the historical bull and bear market relationships, which is but one reason for my view on this rally. Another is value, which is another aspect of Dow theory that few understand. However, this is something that E. George Schaefer, the great Dow theorist of the 1950's and 60's stressed as does Richard Russell today. From a Dow theory perspective, all secular bear markets have ended with stocks at great values. A measure of that value has historically been seen with the dividend yield being roughly equal to the PE ratio. In 1932 the yield on the S&P 500 was 1.50 with a PE of just under 10. At the 1942 low the yield was 8.71 with a PE of 7.3. In 1974 the yield was 5.9 with a PE of 7.24. Even at the 1982 low the yield was 6.2 with a PE of 6.9. Well, at the March 2009 low the PE was 23.77 with a dividend yield of 3.58. At the October 2002 low the PE was 29.95 and the yield was 1.98. As you can see, neither the 2002 low nor the 2009 low represented the great values that have been seen at previous secular bear market bottoms.
It is the valuations aspects of the market along with the normal phasing and bull and bear market relationships that are at the core of my belief that the bull market topped in 2007 and not in 2000. It is also my belief, based on my studies of Dow theory, that the rally out of the 2009 low will ultimately prove to be the rally separating Phase I form Phase II of the ongoing longer-term secular bear market. For what it's worth, I have also discussed this very topic with Richard Russell and he confirmed this viewpoint.
Another issue that I want to briefly touch on is commodities. I continue to believe that the "one market" effect of the liquidity driven mania that began at the 2002 low pushed everything into a bubble. Housing peaked first in 2005. Equities followed with their peak in October 2007 and commodities finally pushed into their top in July 2008 in accordance with my statistics surrounding the 3-year cycle, which I called perfectly in accordance with my statistical findings. Anyway, from these liquidity driven high points, the markets all pretty well bottomed in sync with one another in or near the March 2009 timeframe. Since those early 2009 lows, I have said that the advances we have been seeing have likely been bear market rallies and that I ultimately expect a deflationary outcome in association with K-wave winter. But, at the same, understand that this is not some stubborn belief that I'm clinging to just to be different. I've learned not to rule out anything and I will ultimately let my statistical data guide me once again.
Now, with that all being said, 2010 should be the year that the great inflationary/deflationary debate should be settled or at least begins to be settled. Reason being, there are significant structural and cyclical events that will be coming together later this year in commodities, gold, the dollar, equities and even bonds. The outcome as we move forward into these statistical and cyclical crossroads will without a doubt be key. With commodities, the longer-term cycle of importance is the 3-year cycle. In 2008 I called the top of the commodity bubble simply following my statistical data and by watching and understanding the meaning of the "DNA Markers" that I have identified and that have historically marked significant tops for commodities in the past. A bit later in 2010 commodities will be moving into another of these statistically important windows and these details are monitored and discussed in the monthly issues of Cycles News & Views. My hunch is that price will set itself up once again in accordance with the statistical "DNA Markers" that have occurred at all major tops. If so, this should coincide with the tops of the bear market rallies that began at the March 2009 lows, the decline into the Phase II bear market and the return of the deflationary forces of K-wave winter. On the other hand, if price does not setup in accordance with these statistical hurdles and "DNA Markers" then that in turn could be setting the stage for the inflationary scenario to come to fruition. In either case, I will simply watch the statistics and let the market tell me how things set up. As we move further into 2010 these statistics will be extremely important as to which scenario unfolds.
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