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The
bullish Dow theory trend change that occurred in association with the advance
out of the March 2009 low still remains intact. Cyclically, the advance out
of the March low also still remains intact. Intermediate-term, equities are overbought
and I do see weakness on the horizon. The key to this materializing will be
the downturn of my intermediate-term Cycle Turn Indicator.
Longer-term,
my research continues to tell me that this is still a bear market rally
within the context of a much longer-term secular bear market. Robert Rhea,
the great Dow theorist of the 1930's wrote: "Bear markets seem to be
divided into three phases: the first being the abandonment of hopes upon
which the final uprush of the preceding bull market was predicted; the
second, the reflection of decreased earnings power and reduction of
dividends, and the third representing distressed liquidation of securities
which must be sold to meet living expenses. Each of these phases seems to
be divided by a secondary reaction which is often erroneously assumed to be
the beginning of a bull market."
From a
Dow theory perspective, I continue to view this as the rally separating Phase
I from Phase II of what should ultimately prove to be a very long and very
ugly secular bear market. I totally realize that this may be a difficult
concept to grasp, but this comes as no surprise to me. In 1929 the Phase I
decline carried the market down into the November 1929 low. From that low the
market rallied into April 1930. As I read the writings of that period it is
obvious that they too found it hard to believe and the politicians of the day
tried desperately to convince the masses, and probably themselves, that the
bear market was over. But, in spite of the efforts to hold things together and
in spite of the propaganda spread by the politicians of the day, the bear
market resumed and ultimately found its low after an additional 86% decline
into the Phase III low in 1932.
During
the secular bear market of 1966 to 1974 the Dow theory warned that the
rallies into the 1968 and 1973 highs were bear market rallies. Yet, few
believed this and again the politicians and media tried to convince the world
that the decline was over. Ultimately, the secular bear had his way and the
final Phase III low came in December 1974 after a 46.58% decline from a new
recovery high in January 1973. It was at the December 1974 low that Richard
Russell announced in his December 20, 1974 Special Report that "We are
finally in the zone of Great Value." It was then in Mr. Russell's
January 24, 1975 letter that he gave the hurdles that had to be bettered in
order for Dow theory to confirm a primary trend change. The benchmarks were
then bettered on January 27, 1975 and in Mr. Russell's February 5, 1975 issue
he made the official call of the Dow theory bullish primary trend change.
The key
to Mr. Russell properly calling this low, from my eyes, was that in spite of
the propaganda and erroneous media reports throughout that period, Mr.
Russell understood the Dow theory and more importantly the phasing and value
aspects of Dow theory. As a result, he was able to navigate that great bear
market and to recognize the bear market bottom when it appeared. The
same disciplined approach was used by George Schaefer during the 1950's and
60's to navigate that great bull market. Before that, Robert Rhea used the
Dow theory to call the 1932 bear market bottom and William Peter Hamilton
before that to call the 1929 top in his famous editorial in the Wall Street
Journal titled "A Turn In The Tide. My point here is that Dow theory can
guide us this time around as well if we have the ears to listen to what it's
telling us.
I have
discussed the phasing of this bear market with Mr. Russell. I explained to
him that based on my read of the Dow theory that the March 2009 low appears
to have only marked the Phase I low and that the ongoing rally should
ultimately prove to separate the Phase I from Phase II of the ongoing secular
bear market. Mr. Russell agreed with my assessment at that time and to date
I'm not aware of anything that has changed this assessment.
From a
value perspective, history shows that the dividend yield and the P/E will be
roughly at par at true bear market bottoms. As an example, I show that the
yield on the S&P at the 1932 low was 10.5 with a P/E just under 10. At
the 1942 low the yield was 8.71 with a P/E of 7.3. At the 1974 bear market
bottom I show the yield on the S&P to have been at 5.9 with a P/E of
7.24. Even at the 1982 low the yield was 6.2 with a P/E of 6.9. At the March
2009 low I show the yield on the S&P to have been at 3.58 with a P/E of
24, which has historically been considered overvalued. At present, I show the
yield on the S&P to be 1.99 with a P/E of 144.83. Yes, that is right. The
current P/E, based on Generally Accepted Accounting Principle, is one hundred
forty four. The historical P/E ratios at the previous lows were also
calculated using Generally Accepted Accounting Principles, so these numbers
are consistent. If you are seeing any other number showing much lower P/E's
it is because it is a George Orwellian phony bologna calculation. If the
S&P were to trade with a GAAP P/E of 20, which has historically been
considered overvalued, it would be at 150. If the S&P were to trade with
a P/E of 15, which has historically been considered to be fair value, it
would trade at 113. My point here is that at the March low the P/E and the
yield were no where near par and thus the market did not reach levels in
which true secular bear market bottoms are made. Plus, with the spread
between the current P/E and the yield at an historic 142, the market is
grossly overvalued. This will ultimately be corrected with the Phase II and
Phase III declines. If you have not read my article on Bull and Bear market
phasing I urge you to go to www.cyclesman.info/BullBearRelationships.htm and do
so.
As for
gold, I reported here in my last post in early October that gold was in
uncharted waters and that I believed that the 9-year cycle was stretching. In
light of the recent advance above the March 2008 high, which marked the
9-year cycle top, current developments suggest that perhaps the 9-year cycle
is not stretching and that perhaps it did bottom in October 2008. If so, we
truly are in uncharted waters, but this comes as a double-edged sword and I
will be discussing the developments in great detail in my research letters
and short-term updates. As of this writing, gold remains positive as the bear
market rally separating Phasing I from Phase II of the ongoing secular bear
market continues.
I have
begun doing free Friday market commentary that is available at www.cyclesman.info/Articles.htm so
please begin joining me there. The specifics on Dow theory, my statistics,
model expectations, and timing are available through a subscription to Cycles
News & Views and the short-term updates. I have gone back to the
inception of the Dow Jones Industrial Average in 1896 and identified the
common traits associated with all major market tops. Thus, I know with
a high degree of probability what this bear market rally top will look like
and how to identify it. These details will be covered in the November
research letters and will cover this in future letters and as this all
unfolds. I also provide important turn point analysis using the unique Cycle
Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil,
gasoline, the XAU and more. A subscription includes access to the monthly
issues of Cycles News & Views covering the Dow theory, and very detailed
statistical based analysis plus updates 3 times a week.
Tim Wood
Editor, Cyclesman.com
Also
by Tim Wood
Copyright
© 2004-2008 by Tim W. Wood. All rights reserved.
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