The Dow Report: Sentiment: Does It Matter Anymore?
By Tim W Wood CPA, August 5, 2005
August marks the 20th month in which the Industrials continue working back and forth within approximately a 6% trading range. The upper limit of this range is 10,700 and the lower limit is 10,100. There have been two false breaks through the upper limits of this trading range and five false breaks to the down side. The break in April, as marked in red, carried the averages below their January lows creating a confirmed "Secondary" Dow theory sell signal. This was the most technically damaging break down since March 2004. But, once again the Industrials rebounded out of this false break and have since invalidated the "Secondary" sell signal and are re-testing the upper boundaries of this trading range.
I have plotted in the upper window on the chart below the Investors Intelligence ratio of bulls divided by bears. When this ratio is greater than 1, there are more bulls than bears. When this ratio is less than 1, there are more bears than bulls. This trading range has created the Second most consecutive bullish sentiment readings with this ratio greater than 1 since such data has been kept. As of this writing this ratio is in its 145th consecutive week of more bulls than bears. Does this "really matter?"
Well, let's go back to the 1998 to 2002 time frame. Even the bulls of that time now know, with the benefit of hindsight, that the 1999 to 2001 period was a topping/distribution process. The reality is that this marked the end of the greatest bull market advance ever seen. On a shorter term basis this trading range and topping/distribution process marked the end of the advance that began out of the 1998 4-year low.
During this topping process the market spent some 29 months in a trading range very similar to the one today. Trouble was that very very few people recognized this trading range to be the topping/distribution process that it was. This is evident because during this time frame Investors Intelligence recorded 152 consecutive weeks with the Bull/Bear ratio greater than 1. Yes, this was the Most bullish sentiment readings ever recorded in terms of consistent bullishness and it occurred right at the top of the greatest bull market known to man.
But, as usual at major turn points, this persistent bullishness served as just another indication that the majority were about to be wrong and in a very big way. It was in the summer of 2001 that I used my cycles work to give specific targets that could be expected as the market dropped into the 2002 4-year cycle low. My target was hit almost perfectly with the Industrials, exceeding that target on the down side by 202.57 points. Very few listened, but those who did were rewarded handsomely.
This now brings us back to the advance that began out of the 2002 4-year cycle low. As you should all know from last week's write-up this advance also represents the rally separating Phase I from Phase II of this ongoing great bear market. That advance basically concluded February 2004 as the market is still at these same levels today. What has happened since February 2004 has been the continuation of another long consolidation period that actually began in December 2003 as defined by the boundary lines shown in the chart above.
So, here we sit today within a 600 point trading range. While within that range the market has given the bears five false breaks. These false breaks have served to further fuel the bullishness and to discredit the bears. I hear stories all the time as to why this time is different and why cycles and Dow theory are no longer valid. Yeah, Right! While within this range the bulls have had two breakouts and again this too has served to further the bullish hopes of the masses. All the while, we still have the Primary Dow theory sell signal in place. Furthermore, the market has just completed its 145th week of more bulls than bears marking the Second most consistent bullish reading of all time. Yet, the reality is that the market is right where it was January 2004.
Understand that sentiment readings are not timing tools. No, sentiment readings are only a measure of the mood so to speak and such readings do not matter until they matter and then they will matter a lot. When the decline into Phase II begins, these cattle will stampede and this extreme bullishness will give way to selling. When this begins, no one and I mean no one will be able to save it as the natural forces of the market will prevail.
But, in the meantime this topping/distribution process continues as the bulls become even more bullish just as they did during the 1999 through 2001 topping process. I warned people in 2001 of the Phase I decline and I continue to warn you now that Phase II of the greatest bear show on earth is still ahead.
If you would like more details in regard to this bear market, then consider Cycles News & Views as your source. Yes, You have been warned, Again!
Tim W. Wood
© 2005 Tim Wood
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Tim W. Wood CPA
Cycles Man
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