A Brief Market Update and Review of the Bull/Bear Market Relationship
From a Dow theory perspective, the primary bearish trend change that occurred in August in conjunction with the decline into the October low remains intact. But, as this low was being made, I stood alone in saying, in the articles posted here at that time, that not all bearish primary trend changes were created equally and that what we were seeing was a cyclical and secondary low point being made rather than the beginning of a melt-down as was the general consensus at the time. This has proven correct and the expectations associated with that low have unfolded, at least thus far, as anticipated. Short-term, the market is probing for a cycle top, which will be followed by more weakness into the next short-term cyclical low. As this short-term cycle ebbs and flows within the context of the ongoing intermediate-term cycle, the intermediate-term cycle also ebbs and flows within the context of the longer-term advance separating Phase I from Phase II of the even longer-term bear market that began at the 2007 top. In other words, we have price movement of varying degrees all occurring simultaneously and it is the cyclical and statistical work that helps us to identify and therefore understand what it occurring at various levels.
As an example, it was this work that allowed me to understand and to identify the October low as an intermediate-term cycle low rather than the stepping off point for lower prices as so many were expecting at that time. I said at that time that a much larger trap was being set for both bull and bear alike. In light of the volatility seen following the October low this has proven correct. Ultimately, the DNA Markers that have been seen at every major top since 1896 will appear and when they do the stage will be set for the Phase II decline of the much longer-term secular bear market that began at the 2007 all time high. The decline into the Phase II low should prove to be a financial train wreck to say the least, as the same deflationary forces seen in 2008 and into early 2009 should again be felt in association with the Phase II decline. Yes, this should include commodities, housing and equities as well as other asset classes. Also, history tell us that the Phase II declines tend to be far worse than the Phase I declines. Therefore, this in turn suggests that this time around, once this setup begins to unravel, any efforts by the powers that be are apt to be futile. Do not be blind-sided. The DNA Markers that have been found to have occurred at every major top since 1896 will provide us with guidance and an understanding of what we should expect as we move forward. The fine folks at CNBS did not see or understand what was occurring in conjunction with the 2000 top and what was setting up to follow. They did not see and understand what was occurring at the 2007 top, nor with housing in 2005 or with commodities in 2008. They do not understand what is occurring now and even if they did they could not tell you. You have been warned. Don't be blind-sided again!
Therefore, it is imperative that you understand the bigger picture. So, let's review the bull and bear market relationships. I have written about this before, but I continue to receive questions and with us moving into a new year this is a good time for a review. But, before I even begin, I want to clarify that cycles have absolutely nothing to do with Dow theory. Cycles and Dow theory are two completely different disciplines. However, they can be used to compliment each other if we understand both disciplines.
With that being said, the bull and bear markets of the late 1800's and very early 1900's, which Dow, Hamilton and Rhea wrote about, are one in the same as the upward and downward movements of the 4-year cycle. In other words, the upside portion of a 4-year cycle was the same thing as a bull market, in accordance with Dow theory, and the downside portion of the 4-year cycles were the same as the bear markets in accordance with Dow theory.
But, beginning in 1921, these bull and bear market periods began to grow in duration. I feel that this is a direct result of the growth in population. As our country grew, more and more people began investing and as a result, the bull and bear periods became longer. In turn, bull and bear markets evolved into a series of multiple 4-year cycle events. 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," as it would be termed, in accordance with Dow theory, that followed was the upside portion 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 some 500% from the 1921 4-year cycle low at 63 on the DJIA to the 1929 4-year cycle top at a high of 381.
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 976% 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 in percentage terms of the advance, this bull market advance was roughly double the preceding great bull market of the 1920's. 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, let's 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 both a cyclical and a Dow theory 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, but in reality, that is when the new bull market became obvious. The low occurred in 1974 and Richard Russell called that low at the time using Dow theory. The bull market that began in 1974 carried price up into the 2007 top, which was a period of 33 years and consisted of a series of eight 4-year cycles with a total advance of 2,390%. Note that once again this bull market advance more than doubled the magnitude of the preceding bull market advance, which is also another consistency.
If we apply the normal bull/bear relationship of approximately one-third, then given that the last great bull market ran some 33 years, this bear market should last until somewhere late in this decade. I will add to that, the more they monkey around with the natural forces of the market, the longer they are apt to drag things out and the worse it will be. Because the 2009 low occurred only 17 months after the 2007 top, that low falls far short of the normal one-third relationship that has historically been seen. Therefore, based on these historical relationships I do not believe that the bear market bottom was seen at the 2009 low.
Also, according to Dow theory, each bull and bear market period has three separate phases. This phasing is an important aspect of the Dow theory that is most often over looked. The 1966 to 1974 period is a perfect example of a bear market, its three phases and the rallies separating each of the phases. Therefore, I will use that chart to illustrate this concept.
Referring to the chart above, Phase I of the second great bear market began at the top in February 1966. This top was confirmed by Dow theory in May 1966. From this top the market declined into the Phase I low in October 1966. This Phase I decline is marked in blue on the chart above and it carried the market down some 25%. From this Phase I low the typical rally that serves to separate Phase I from Phase II began. This rally carried the market up some 26 months and is marked in green on the chart above. During this 26 month advance you can see that there were a couple of false breakdowns that the market was able to recover from and inevitably pushed higher. In fact, with the advance into 1968 bettering the 1967 secondary high points, a traditional Dow theory bullish trend change even occurred.
But, those who truly understood Dow theory phasing understood that this was a bear market rally separating Phase I from Phase II of a much longer-term bear market and not a new bull market. In spite of the false breaks, the bullish sentiment, false recoveries, claims of new bull markets and the endless confusion and frustration, the Dow theory phasing prevailed and the decline into the Phase II low carried the market down some 36% to new lows over a 17 month period. However, the decline into the Phase II low did not begin until after the DNA Markers that have been seen at every major top since 1896 were in place and it is these same DNA Markers that are now key. This Phase II decline is marked in red on the chart above.
Based on my longer-term studies, we appear to have a similar situation today. I believe that the rally out of the March 2009 low is the rally that will ultimately separate Phase I from Phase II of this long-term secular bear market and that it is synonymous with the rally into 1968. However, because the preceding bull market was longer in duration, the bear market that follows will also be longer as will each phase and the rallies separating each of these phases. Currently, the period since the summer of 2011 has been a recipe for frustration and uncertainty much like that seen during the false break and sideways action in the late 1967 and into the mid 1968 timeframe.
It is because the setup at the recent May high was incomplete that the evidence suggested the break into the October lows was a false break. The price action that has followed the October low has proven that the October low marked a secondary low point in accordance with Dow theory and it is the DNA Markers that are key. These DNA Markers did appear at the 1968 top and have also been seen at every other major top in stock market history. This time should be no different and the details of these DNA Markers are covered in the monthly research letters. Until such time as this setup materializes, the illusion that the worst is behind us will prevail as will the state of confusion and frustration.
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