Tim W Wood CPA's Contributions

I continue to believe, based on the evidence at hand, that the rally out the March 2009 low is a large scale bear market rally that should ultimately prove to separate Phase I from Phase II of the much larger and ongoing secular bear market. But, just as I told my subscribers before that low was even made, the longer this rally holds up, the more dangerous it becomes.

Of late I have been asked whether or not the bettering of the April highs triggered a so-called “Dow Theory buy signal.” Before I answer this question, it deserves a full explanation. First let me say that in accordance with orthodox Dow Theory, there is no “buy” or “sell” signal. That’s right. Contrary to popular belief, there is no such thing. The Dow Theory founding fathers would anticipate trend changes just like we do.

The primary trend change associated with the rally out of the March 2009 Phase I low still remains intact in accordance with Dow theory. We do have other tools and the DNA Markers that have occurred at every top since 1896 that are also very important and are being closely monitored. However, in according to orthodox Dow theory, the counter-trend bear market advance separating Phase I from Phase II of the longer-term secular bear market still remains intact at this time.

Based on the longer-term phasing aspects of Dow theory, the rally out of the 2009 low continues to appear to be a long-term bear market rally. At the same time, there is also still no change in that the primary bullish trend change associated with the 2009 low also continues to remain intact. Point being, the advance out of the 2009 low is a counter-trend move within the context of the longer-term bear market.

It has now been some 19 months since the March 2009 low. Because of the duration of this rally, many are beginning to wonder how I can continue to say that it’s a bear market rally and not a new bull market. The answer to this question lies with the historical bull/bear market relationships, Dow theory phasing and values.

This past week I received an e-mail blasting Dow theory. The allegation was that Dow theory no longer works and that it is completely irrelevant. The reason sited for Dow theory allegedly being wrong was that following the so-called Dow theory “sell signal” in late June, the market has rallied and continues to do so. Therefore, the question was, “How can Dow theory be valid?”

Of late there has been a lot of attention on the Hindenburg Omen and the excessive number of 90% volume days. I’ve been receiving e-mails and phone calls asking me about this and how it affects my work. In short, it doesn’t. Here’s why.

In 2005 I used cyclical analysis to identify the top in housing. That topping process was covered in a series of articles posted here in 2005 and into 2006, as the topping process matured and then eventually became obvious to all. Cyclically, housing is now at another important crossroads.

Periodically, the question of manipulation comes up and I’ve recently been asked if the Dow theory or any other technical method is still of value because of all the efforts to manipulate the markets. The short answer is, yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end it will only serve to make matters much worse.

On June 30th both the Industrials and the Transports closed below their June 7th lows. In doing so, anyone who had not already proclaimed a Dow theory “sell signal” seems to have done so at that time. I stated here in my last post on July 9th as well as in recent audio interviews that I disagreed with anyone who has made such statements in regard to Dow theory. I have since received a number of questions asking me how so many people could be wrong about Dow theory and if my position has changed.

The Dow theory has certainly been a hot topic of late. Seems that everyone has become a Dow theory expert and the price action into the July 2nd low had everyone tripping over each other to make the call that a Dow theory “sell signal” had occurred. I could not disagree more and I told my subscribers over the weekend that a so-called Dow theory “sell signal” had not occurred and that rather than a melt down, a bottom was expected.

Ever since the rally out of the March 2009 low began, I have maintained that it has been a bear market rally. All the while, the politicians think that their printing spree, bailout plans and stimulus packages have put a bottom in the economy. I continue to hear the talking heads on "CNBS" cheering on the public, and in their eyes all they can see is the so-called "double dip" recession.

I continue to receive questions regarding Dow theory and whether or not a so-called "sell signal" has been triggered. Technically, with Dow theory there is no such thing as a buy or sell "signal." Rather, the Dow theory founding fathers anticipated trend changes and during these periods of such participation they would begin to establish their positions ahead of the anticipated trend change.

Cycles are really just another way of looking at various trends of various degrees. Also, cycles in the market are really no different than many other cycles in nature. As an example, sometimes we have an early spring and sometimes it’s late. Sometimes a particular bird’s migration is earlier than normal and sometimes it can be a bit later than normal.

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.

In today’s update I want to look at the market from a couple of different perspectives. Recently, I have heard it said that the Dow Theory is now giving a “Buy Signal.” This is not exactly true. In order to explain where we are from a Dow Theory perspective, I first have to explain where we have been.

From a Dow theory perspective, the primary bearish trend confirmation that occurred the on November 21, 2007 remains intact. According to Dow theory, it’s the close that counts and up until March 7, 2008, the averages have both been operating within the boundaries of the previous two secondary high and low points.

Since the rally out of the January lows began, I have heard it said on numerous occasions that the strength of the Transports somehow has bullish undertones and implies that the decline is over. The overall spirit of the comments I have been hearing has to do with the fact that the Transports have recovered more than the Industrials.

Just as the equity markets were pushing into their anticipated turn point in late January, the Fed makes a 75 basis point cut of the Discount rate. This was the most aggressive rate cut since August of 1982. The very next week at the regularly scheduled Fed meeting they cut yet another 50 basis points.