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THE DOW REPORT
Bull and Bear Market Relationships

Recently, I received a call from one of the newer FSO listeners asking me to go through the Bigger Picture issues concerning Dow theory and its relationship to the secular bull and bear markets. It has been quite some time since we did this, so for the benefit of newer listeners, we will walk through these issues today.

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. Understand that Cycles are not a part of Dow theory, but when I combine my findings from Dow theory with my findings from my cycles work, some very obvious conclusions about both the occurrence and nature of Bull and Bear markets become very clear.

When reading about the Bull and Bear markets of the late 1800’s and very early 1900’s, I realized that the Bull and Bear markets, which the early Dow theorists wrote about were the exact same movements of the advancing and declining 4-year cycles of that day. As our country became more and more sophisticated and more people started investing, these Bull and Bear periods became longer. The Bull and Bear market periods as defined by Dow theory evolved into a series of multiple 4-year cycles. For example, the Bull market from 1921 to 1929 was a period of two 4-year cycles. The low in November 1929 was a 4-year cycle low. According to Dow theory, the rally that followed was a “Secondary Reaction” that served to separate Phase I of that great Bear market from Phase II. Cyclically, this same rally was the upside piece of a 4-year cycle. Once this “Secondary Reaction” was over, the DJIA moved down below the previous 4-year cycle and Phase I low and into the 1932 4-year cycle and Phase III low, which proved to be the Bear market bottom.

Now let’s look at the magnitude of these bull and bear market advances and declines. The “Primary” Bull market advance that ran between 1921 and 1929 took the market up 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.

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 comprised a series of six 4-year cycles. 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.

This time around, the second great Bull market advanced a total of 1,076% from the 1942 4-year cycle low at 93 to the 1966 4-year cycle top at a high of 1,001 on the DJIA. The bear market that followed ran from the 1966 high to the 1974 4-year cycle low at 570.

From a cyclical perspective, the last and Greatest Bull market of all time began with the 1974 4-year cycle low and ran to the recent 4-year cycle top in January 2000. This “Primary” Bull market comprised a series of seven 4-year cycles and advanced a total of 2,061% from the 1974 4-year cycle low of 570 on the DJIA to the January 2000 high of 11,750.

Therefore, you can see that each of these Bull market periods has been comprised of a longer and longer series of 4-year cycles. Additionally, the percentage advancement of each Bull market has been roughly double the previous Bull market’s percentage advancement. The Bear markets have also indeed lengthened in terms of the duration as well.

What About the Bear Markets?

The 1921 to 1929 Bull market was 8 years in duration and the 1929 to 1932 Bear market was 3 years. The Bear market duration was 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. This Bear market duration was 33.3% of the preceding Bull market. The last Bull market ran from 1974 to 2000 and was 26 years in duration. Some argue that the last Bull market began in 1982. I disagree. In 1982 the Bull market broke out and became apparent; the low occurred in 1974. So, 33.3% of the previous 26 year Bull market would mean that this Bear market would last some 8 ½ years; 37.5% would mean that it would last approximately 10 years. As I see it the 2002 low was NOT the bear market low. No, this was only the Phase I low. I believe that the Phase II and Phase III lows still lie ahead and that we should expect the final bear market low in approximately 2010.

What about Value?

Aside of the phasing aspects with Dow theory which are telling us that we have only made the Phase I low of this great Bear market, we have the issue of Value. At true bear market bottoms I have found that Yields tend to equal the Price Earnings Ratios. For example, at the 1932 Bear market bottom the Yield on the S&P was 10.50 and the P.E. was just under 10. At the 1942 Bear market bottom the Yield was 8.71 with a P.E. of 7.3. At the 1974 Bear market bottom the Yield was 6.2 and the P.E. was 6.9. At the 2002 low the S&P Yield was 1.90 and the P.E. was 30.

Where Are We Now?

I know that many continue spouting that we are in a new bull market. I know that many believe that the Dow theory is obsolete and no longer applicable. I know that many believe that “they” can control the markets forever. I know that many believe this time is different for this reason or that. I know all the arguments, but I don’t believe them. No, these Bull and Bear market periods have grown in time. The 2002 low did not fit according to the Phasing of Dow theory, nor according to the normal Bull/Bear market relationship or according to the historical Value measures seen at true secular Bear market lows according to Dow theory.

Robert Rhea explained that each of the Bear market phases are divided by important rallies. Here is what he had to say; “Each of theses phases seems to be divided by a secondary reaction, which is often erroneously assumed to be the beginning of a bull market. Such secondary movements seldom prove perplexing to those who understand the Dow theory.”

The reason Rhea says “secondary movements seldom prove perplexing to those who understand the Dow theory” is because the Dow theory student is a market historian and market historians will understand the phasing and what is unfolding. I have very little doubt about what is unfolding in the bigger picture. I have little doubt about the rally out of the 2002 lows being the rally separating Phase I from Phase II of the ongoing bear market. The reason that the average person can’t see this is simple. They do not understand Dow theory or market history. Furthermore, the average person likely doesn’t want to understand or believe that we are in an ongoing bear market because it does not fit in with their wishes. After all, can’t everyone see that the market has been up for 3 years? So, how in the world could we still be in a bear market? Only a crackpot would say something like this. Also, we have the boys and girls on TV telling us how great everything is. But, they too do not understand market history or the Dow theory. Most people are looking at the economic data and telling us that it all looks good.

William Peter Hamilton called the averages “The Stock Market Barometer” because it looks forward at what is coming. The averages continue to warn, but only a few understand these warnings. The decline into the Phase II low is still ahead and over a hundred years of market history tells me that we will not escape that decline. Also, think about this for a moment. If things were all so well with the stock market, why is it that the liquidity pump continues pumping while raising rate and telling everyone all is well? Why is it that the public is constantly being bombarded by the cheerleading on TV? Why is it that Greenie spends so much time talking the market up? Why is it that “they” threatened to drop money out of helicopters? Why is it that “they” manipulate the economic data? Why is it that “they” bring out revised data just before the market closes when it reacts negatively to data that was released earlier that same day? Why is it that when we were truly in the bull market back in the 80’s and 90’s that this sort of thing did not occur or at least not to this degree? Could it be that “they” understand the Dow theory? Could it be that “they” know the true underlying condition of the market and that this is the reason for these actions and reason that “they” keep feeding the public a line of “Bull”? Nah, surely not!!! “They” wouldn’t lie to us. All is well and “they” are just doing this for no reason whatsoever. Surely, I’m just misinterpreting the Dow theory or maybe I’m just paranoid.

Below is a chart of the second great Bull market top and the Bear market that followed. The Phase I decline is marked in blue. The rally separating Phase I from Phase II follows and is marked in green. The Phase II decline is marked in yellow with the rally separating Phase II from Phase III in green. The final leg down into the Bear market and Phase III low is marked in red.

Next I have the current chart. The Phase I decline is marked in blue and the advance separating Phase I from Phase II is marked in green. You have been warned, Again!

I sincerely hope that this background has helped the newer listeners to understand where we are and where the markets are likely headed. I try to help the investor understand the financial times that we are facing and through my monthly newsletter and subscriber updates I also try to help people time the intermediate and long term cycle changes so that they know what’s coming just over the horizon. For more information please visit my web site at www.cyclesman.com

Tim W. Wood

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