According to the sentiment of the e-mails I’ve been receiving of late, it seems that the concept of the advance out of the March 2009 low being a bear market rally is becoming harder and harder to understand. As price moved down into the cyclical lows in late February 2009 I told my subscribers that price was moving into a higher degree low, i.e. the 4-year cycle low, and that the longer the market rallied the more dangerous it would become. I said this, meaning that the longer the market rallied the more convinced the public would become that THE bottom had been seen.
Current sentiment reminds me a lot of the 2006 and 2007 period. I specifically remember that everyone who had ever heard of the 4-year cycle in the stock market was convinced that it bottomed in June 2006 and that the market risk was nil. I explained all throughout that period that, yes, while the intermediate-term indicators were in fact on a buy signal, that the 4-year cycle had not bottomed and that the decline into the 4-year cycle low was still ahead. I explained that the cycle had stretched and my reasoning for that was that none of my DNA Markers seen at all other all other 4-year cycle tops and bottoms since 1896 had been seen. Still, very few believed this. The basis for the common rationale was that it was much easier to believe the masses and what appeared to be the obvious in light of the continued advance rather than the longer-term research, which was contrary to every other opinion out there. I warned during this time that the 4-year cycle had been stretched as a result of the efforts to “fix” things and that once it turned down that these efforts to fix things would prove to have only made matters much much worse. That is exactly what happened and I remember having grown men calling me, literally crying about their losses. I remember them telling me that they just could not believe what I was saying. I had other say that if they had only known, they would have gotten out of the market. Fact is, even if they had known, they likely would not have listened as was the case with so many. Reason being, far too many people believe what they want to believe and are not objective in their thinking. I know that in other cases people lose their focus on the bigger picture because things may not develop as fast as they wish and/or they just grow impatient about the longer-term picture. Whatever the reason, the public is once again being lulled to sleep by the duration of the rally out of the March 2009 low and the propaganda that is being spewed by the mainstream. In an effort to help people focus on the bigger picture I want to again talk about the historical relationship between bull and bear markets.
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 as a result the bull and bear periods became longer. 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 and even a Dow Theory 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, were that Phase I of the 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 in early 2007 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 bear market. This was written in an article on February 29, 2007.
Anyway, the advance that followed this reconfirmation carried the averages up into a joint high in July 2007. From that high a Dow Theory non-confirmation was born and we all know what followed into the 2009 low. More importantly the DNA Markers that have been seen at all major tops since 1896 also appeared in junction with the 2007 top. It will again be these same DNA Markers that will eventually cap this bear market rally.
The bottom line is that the bull market advance that began in 1974 ran 33 years and 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. At present, we are seeing the ongoing rally that should prove to separate Phase I from Phase II of what should prove to be a bear market of approximately 10 to 12 years duration. To think that a 33-year bull market was corrected in a mere 17 months simply has no historical basis. Based on the historical bull and bear market relationships, this bear market is expected to run some 33 to 37 percent of the duration of the preceding bull market. If so, with the bull market having lasted some 33 years in duration, a typical bear market relationship would last some 10 to 12 years, which, based upon the 2007 top, would take such a decline into 2017 to 2019. I will discuss other aspects of the bull and bear markets including phasing and values in the next post here in a couple of weeks.
