Secular Bear: Understand the Market

Over the past few months, I have been developing a thesis on the current market. With some research and knowledge of the Dow Theory, I've concluded that we are in a long-term or secular bear market. The current environment may feel like a bull market, but it is only a short-term or cyclical bull market. You can make good profit in this environment but you must be award of the changing tide that can occur abruptly.

The Decline and Rally

The market (Dow) reached a record high of 14,164 on October 9, 2007 and reached a low of 6,440 on March 9, 2009. A 50% retracement of this two number ([14,164 + 6,440]/2) is 10,300. That is my next Dow target for the rally. Right now, the rally have not even taken us to 38.2% (9,391) retracement level. You cannot call this a bull market just yet. Look closely at the chart below. After the Dow break below the 50% mark, it collapsed. Short-term picture is very bullish.

Historical Statistic

I've obtained this figure from Dow Theory letter #1320 published on June 21, 2001 (post dot-com bubble). It is an observation conducted by David Armstrong Poole of Briarcliff. This information will give you perspective on time and cycle.

The Dow from 1914 to 1929 was up 620% over 15 years.

The Dow from 1929 to 1949 was down 58% over 20 years.

The Dow from 1949 to 1966 was up 520% over 17 years.

The Dow from 1966 to 1982 was down 22% over 16 years.

The Dow from 1982 to 2000 was up 1400% over 16 years.

Mr. Poole estimated that the Dow will be down 30% from 2000 to 2016. The average cycle of down market is 16.8 years.

The Dow is currently down ~20% over 9 years.

Dow Theory Perspective

From the Dow Theory view, Richard Russell stated in his daily remark on July 23, 2009 that this past bull market expanded from 1980 to 2007, 27 years. Most bear markets tended to last from 1/3 to 1/2 as long as the preceding bull market. With this, you can almost calculate when bear market will end. 27/3 + 2007 = 2016.

Fundamental Perspective

Jeremy Grantham, well known institutional investors, gave an interview back in June 2009. The title is 'Seven Lean Years' Hypothesis. Seven years from now, it'll be 2016. How ironic.

Summary

If the preceding assumptions are to come true, the Dow true bottom should be in or around 2016. This doesn't mean you can't invest. Smart investors must understand the anatomy of the market and accept it. Invest in the market you have and not the one you want.

Art

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