The Dow Report: Bull and Bear Market Cycles
By Tim W Wood CPA, September 26, 2003
Weekly Recap of the Equity Markets
A lot of technical damage was done this week. The Dow broke back below 9,504.64 as described by the 50% principle. The intermediate term indicators that I use also turned negative. The short-term structure of the trading cycle has turned negative and we now have a weekly swing high in place. These are all indications that the recent rally has concluded and that the decline into the seasonal low could now be under way.
The Dow Jones Industrial Average closed the week at 9,313.15, down 331.67 points for a weekly decline of 3.44%. The Dow Jones Transportation Average was down 130.88 points closing the week at 2,663.83 for a decline of 4.68% for the week. The S&P 500 closed at 996.85, down 36.05 points for weekly decline of 3.49%. The NASDAQ composite was down 113.60 points closing the week at 1,792.10 for a weekly loss of 5.96%.
The Big Picture!
My current analysis of the stock market from a long-term perspective remains bearish. At this time I find the argument of October 2002 marking the 4-year cycle bottom to be still somewhat iffy. I find the argument that we have entered into a new bull market absurd and it is history that will help us understand this.
In the November 2001 issue of Technical Analysis of Stocks & Commodities Magazine, I presented my research suggesting a move in late 2002 that would take the Dow Jones Industrial Average (DJIA) below the 1998 4-year cycle lows. This forecast came to pass with the decline into the October 2002 low. In summary, this research showed that any 4-year cycle that tops in 20 months or less has historically taken out the previous 4-year cycle low. Going back to 1896, but prior to 2002, there were five times where the 4-year cycle had topped in 20 months or less and 100% of these five cycles took out the previous 4-year cycle low. History has proven once again to be the best teacher. The great Bull market period from 1974 to 2000 topped with a 4-year cycle count of only 16 months from the 1998 4-year cycle lows. This little discovery has now proven itself once again. The decline into the October low was the 6th occurrence of this phenomena.
As a result of my study of Cycles combined with my study of the works of the great Dow theorists, Charles H. Dow-1902, William Peter Hamilton-1922, Robert Rhea-1932 and E. George Schaefer-1960, I have drawn many conclusions about the current market conditions, some of which are relevant at this point.
As I read about the Bull and Bear markets of the late 1800s and very early 1900s, it becomes apparent that the Bull markets Mr. Dow wrote about were the upward movements of the 4-year cycle and the Bear markets were the downward movements of the 4-year cycle. Please see the chart below.
As our country became more and more sophisticated and more people started investing, the Bull and Bear periods became longer. Bull and Bear markets evolved into a series of multiple 4-year cycle periods. 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. The rally, "Secondary Reaction," that followed was the upside of a 4-year cycle that topped in only 5 months. Again, any top that has occurred in 20 months or less has historically taken out the previous 4-year cycle low. 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 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 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.
The second great Bull market 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. The bear market that followed ran from the 1966 high to the 1974 4-year cycle low at 570 on the DJIA.
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.
This Great Bull market 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 DJIA. I can assure you; this Great Bear market is just beginning.
How Long Will The Bear Market Last?
As you can see, each Bull and Bear market has been a longer series of 4-year cycles and the percentage advancement of each Bull market has been roughly double the previous Bull market's percentage advancement. The Bear markets have indeed lengthened in terms of the series of the number of 4-year cycles as well.
Now, I want to focus on the Bear market declines. 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 understand that argument, however, from a cyclical perspective the Bull market began in 1974. 1982 was when the Bull market broke out and became apparent. The point I am trying to make obvious here is that this Bear market is just beginning. It was not over with the October 2002 low. Based on the relationships of the Bull and Bear markets of the past we are not very likely to see the bottom of this Bear market before 2008 and possibly as late as 2010. I say 2008 because that would be roughly 33% of the duration of the preceding Bull market. A bottom in 2010 would be closer to the 37.5% decline seen with the first Bear market. From a Cyclical perspective, this Bear market will have to end with a 4-year cycle low. I would say that we should expect the bottom with either the 2006 4-year cycle low and possibly not until the 2010 4-year cycle low.
How Low Could it Go?
My minimum price objective for this Bear market based on my technical studies take the S&P 500 down to approximately 315 and the DJIA down to about 3,000. These targets are also confirmed if I apply a fundamental measure, based on historical P.E. ratios. Let me explain. At bear market bottoms P.E. ratios a found to be roughly equal to the dividend yields. For example, in 1932 the yield on the S&P 500 was 10.50 with a P.E. just under 10. In 1942 the yield was 8.71 with a P.E. of 7.3. In 1974 the yield was 5.9 and the P.E. was 7.24. In 1982 the yield was 6.2 and the P.E. was 6.9. Today the yield on the S&P is 1.7 and the P.E. is 30. Based on today's earnings a P.E. or 10 would take the S&P 500 down to 348. In order for the S&P 500 to produce a yield of 6% it would have to sell at 292 while a yield 8% would mean that the S&P 500 would sell at 219. I know most people are probably saying, "no way that will happen" and that is exactly what I heard back in 2001 when I was calling for a decline into the mid 7,000 range in late 2002. I can assure you this bear market is NOT over and this forecast is highly probable.
Tim W. Wood
© 2003 Tim Wood