The Dow Report: Smoke and Mirrors

By Tim W Wood CPA, December 26, 2003

Now, I'm not saying that the market is going to crash from this point. But, I do expect it to decline significantly once this top is finally established.

A Quote from Robert Rhea

"Following the crash in 1929, which ended in October at 198.69, a secondary reaction in the bear market lifted prices to 294.07. (on April 17, 1930.) [Please refer to the daily close only chart of the DJIA below.] This was a curious movement, and a somewhat deceptive one. Doubtless it was influenced to a considerable extent by the payment of a huge soldier's bonus, the proceeds of which seem to have been spent largely for automobiles.

A fast rally lifted the averages from 198.69 onNovember 13, 1929 to 263.46 on Dec. 7, 1929; then came the decline to 230.89 on December 20, 1929 and when, in the course of the zigzag upward movement to 272.27. on February 13, 1930 was bettered by both averages, many observers took it to be a bull market signal. I can remember having shorted stocks early in December, 1929 after having completed a satisfactory short position in October. When the slow but steady advance of January and February carried above 263.46, I became panicky and covered at considerable loss. With losses piling up every day, I forgot that the rally might normally be expected to retrace possibly 66 percent or more of the 1929 downswing. Nearly everyone was proclaiming a new bull market. Services were extremely bullish, and the upside volume was running higher than at the peak in 1929.

Hamilton had died early in December, 1929, and his comments on the averages were badly needed, at least by this writer. His last discussion of the price movement appeared December 3, 1929, only a few days before his death. Prices were then nearing 263.46. The editorial contained the following prophetic sentence: "...people, assuming that the old bull market is to be resumed at once merely demonstrates that the wish is father to the thought." I have often wished that we might have had Hamilton's views concerning the rally to 294.07." (on April 17, 1930)

The point that I have been trying to make all summer is that the decline from the 2000 top into the October 2002 low was only the first phase of this monster bear market. The rally that has occurred since the October 2002 low has no doubt gone further and lasted longer than anticipated. However, this does not change the fact that this is a bear market rally and thereby it does not change the big picture analysis. As I have talked about before, the bear market phases tend to be separated by important rallies. The rally since October is the important rally that should prove to separate phase one from phase two of this bear market. This means that once the top that is now being seen is complete and the market turns down, we are most likely headed for phase two. Please do not be blinded by the Hope and Hype that this rally has generated. It is smoke and mirrors.

If you would like a serious in-depth technical and statistical analysis that supports these general statements, I urge you to please consider a subscription to Cycle News & Views. The current technical setup could have profound implications for the market. Anyone that has a vested interest in the market will likely be served well to know the statistical odds that this market now faces. I urge you, please don't let the Hope & Hype of Wall Street cause you to be blind-sided. I am so concerned about the technical condition of the market and the complacency of investors that I will send all of my recent analysis to any new subscriber, at no cost, in an effort to help you understand the potential that could very well lie just ahead.

Tim W. Wood

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Tim W. Wood CPA
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