Bull and Bear Market Relationships April 18
By Tim W Wood CPA, April 18, 2008
Obviously, the definitions of Bull and Bear markets differ from person to person. My definition is based on the works of the great Dow theorists, Charles H. Dow, William Peter Hamilton and Robert Rhea. As a result of my study of Dow Theory combined with my study of cycles, which are not a part of Dow theory, I have drawn some very obvious conclusions about the nature of Bull and Bear markets.
As I read about the bull and bear markets of the late 1800's and very early 1900's, it becomes apparent that the bull markets Dow, Hamilton and Rhea wrote about were the upward movements of the 4-year cycle and the bear markets were the downward movements of the 4-year cycle. As our country grew, more and more people began investing and as a result the bull and bear periods became longer. As a result, bull and bear markets evolved into a series of multiple 4-year cycle periods. For example, the first bull market to consist of multiple 4-year cycles ran from 1921 to 1929 and consisted of two 4-year cycles. The low in November 1929 was a 4-year cycle low. The rally, or "Secondary Reaction," that followed was the upside of a 4-year cycle that topped in only 5 months. 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 that 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 was comprised of a series of six 4-year cycles and 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. Note that this bull market advance was roughly double the preceding great bull market. 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.
Now, I want to focus on the bear market declines. Prior to the first great bull market that ran between 1921 and 1929, the bear markets averaged some one-third the duration of the previous bull market. This relationship has also held true with the extended bull market periods as well. For example, the 1921 to 1929 bull market was 8 years in duration and the 1929 to 1932 bear market was 3 years, making the bear market duration 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, which was 33.3% of the duration of the preceding bull market.
From a cyclical perspective, the last and greatest bull market of all time began with the 1974 4-year cycle low. Some say that it began at the 1982 low and I understand that argument. However, from a cyclical perspective the bull market began in 1974 and this was the actual low point of the 1966 to 1974 bear market. 1982 was when the bull market broke out and became apparent.
At the 2000 top, the associated Dow theory non-confirmation and confirmed primary trend change indicated at the time that this great bull market era had ended. Upon the primary trend confirmation in March 2000, all indications, according to Dow theory phasing, was that Phase I of a great bear market had begun. Also, based upon the historical relationships between bull and bear markets that bear market was slated to run into the 2008 to 2010 timeframe, which was 33 to 37% of the preceding bull market. Again, when the rally out of the 2002 low began it appeared that this was simply the rally separating Phase I from Phase II of the bear market.
However, the powers that be threw everything they had at the market and in doing so they allowed the bear to claw its way out of existence and when both averages managed to better their 2000 highs, everything changed in accordance with Dow theory phasing. I said at that time "I can tell you that this confirmation does not signal a "new" bull market, but rather reconfirms the existing bull market." What I was saying here in early 2007 was that the bull market that began in 1974 was reconfirmed as still being intact when both averages jointly bettered their 2000 highs and that we had never entered into a true bear market. This article can be read in the February 29, 2007 Observation.
Anyway, the advance that followed this reconfirmation carried the averages up into their last joint high, which occurred in July 2007, and can be seen in the Dow theory chart below. From the July 2007 joint high the averages moved down into their August 2007 secondary low points. It was then from that secondary low point that things began to once again deteriorate. As you can see in the chart below, the Industrials moved on to new highs while the Transports failed to confirm. This non-confirmation is noted in blue.
It was this non-confirmation that lead to the November decline and with the break below the August secondary low points, noted in green, on November 21, 2007 the Primary trend was once again confirmed as being bearish. That break once again put the market at risk of finally marking the top of the entire bull market advance that began in 1974 at 570 on the Industrials. As of the October 2007 high the bull market advance that began in 1974 has now run 33 years and has consisted of eight 4-year cycles with a total advance of 2,385%. Note that this advance has been roughly double the previous bull market advance in terms of the percentage move out of the low in which the bull market began. Now the questions at hand are, did the October top mark THE top of this entire bull market advance up from the 1974 low or as Richard Russell has recently suggested, are we still operating within this mammoth bull market?
As I first said in my February 29, 2007 Observation I totally agree with Russell's point that we were, at a minimum, still operating within the context of this mammoth bull market at the October 2007 top. Now, as for whether or not the decline that has followed the October 2007 top has been the initial stage of a long and protracted bear market or if we are still operating within the context of the great bull market that began in 1974, I need to see a bit more confirmation.
In the meantime, I can tell you that in the event we have seen THE top, then based upon the normal statistical relationships between bull and bear markets, this bear market would be expected to run some 33 to 37 percent of the duration of the preceding bull market. If so, with the bull market having lasted some 33 years in duration, a typical bear market relationship would last some 10 to 12 years, which based upon the 2007 potential top would take such a decline into 2017 to 2019.
Now, on the other hand, if the great bull market that began in 1974 is still intact, then the efforts seen by the powers that be surrounding the recent March lows will serve to set the stage for another leg up in what would be a very old and very extended bull market. It is my opinion that the constant manipulation to keep things going and to "manage" the economy are only making matters worse. Much worse in fact in the long run. I would rather have smaller bear markets along the way than one huge one in the end and with at least a 33 year long bull market now at play, we are indeed being set up for a rather nasty bear market at some point in the future. Once these manipulative efforts fail, and they will, then that bear market will be underway and there won't be any stopping it. In the meantime, I have to weigh all of the evidence. The key at this time, from my perspective, is to watch the statistics surrounding the 4-year cycle, the behavior of the Cycle Turn Indicator and the Dow theory, all of which I report in my monthly newsletter and short-term updates as this will provide enormous insight into whether we are now operating within a bear market or still within the previously established bull market. According to Dow theory, once the trend is authoritatively established it must be considered to still be intact until it is reversed. As I read the current situation, that reversal may be underway given the current non-confirmation, which is noted in red on the chart above. Also, the move on Friday above the February 1st closing high, is indeed a positive development. But, as I read the Dow theory, the February high did not constitute a "secondary" high point. Therefore, we are still operating between the previous secondary high and low points and according to Dow theory this means that the previously established trend must still be considered to be in force. I do believe that we are now moving up into the secondary high point and that there is a very good chance that the trend has indeed turned up. But, in accordance to strict Dow theory principle, until the secondary high point that we are now pressing into is made, followed by a higher secondary low and then ultimately a bettering of the secondary high point, that is now being made, occurs the previously established trend is still down. Personally, I have been and continue to give the balance of the evidence to the bull at this point. I believe that we will be getting a confirmed Dow theory bullish trend change in the future and like I said in my last interview with Jim Puplava, I think we have made it to the creamy filling of Jim's Oreo theory. Longer-term, we still have issues.
Tim W. Wood
© 2008 Tim Wood