Don't Buy the Hype
By Tim W Wood CPA, January 9, 2009
Historically, bear markets have run approximately one-third the duration of the preceding bull market. From my perspective, the last bull market began at the 1974 low and tried to conclude at the 2000 top. But, as I have said many times before, the powers that be would not let nature take its course. As a result, they created the largest credit bubble in history, not to mention the housing and commodity bubbles, all in an effort to save the stock market. This resulted in what I view as the last gasp up into the 1974 to 2007 bull market top and I believe that the correction of that bull market likely has a lot further to go. Since the housing top in 2005 prices have continued to decline as economic conditions have further eroded. Then, once the credit bubble began to crack, the housing crisis further blossomed as the economic fallout began to deepen. In the first half of 2008 we saw the commodity advance go parabolic and in the last half of 2008 we saw the air come out of that bubble as well. Another surprise for most in 2008 was the advance seen in the dollar.
Now that we enter into 2009, I see us at a bit of a crossroad. What I mean here is that the stock market is in a rebound as are commodities, and the dollar has sold off and still remains below its November high. In addition, the sentiment readings that I monitor are now very bullish as it seems that the masses are hoping that somehow the new administration can do a better job of “fixing things” than the last. Anyone who has been reading my material should know that there is no “fix.” As I have said ever since the rally out of the 2002 low began, all of the tampering with the market would only serve to make matters worse and that has proven correct. I now see the continued tampering in the same light. It will at best only serve to extend the inevitable. The best thing that could happen would be for the powers that be to step back and let nature take its course. The excesses of the past must ultimately be purged from the system.
Anyway, as we stand at this juncture, we have the new administration coming to power, we have a beaten down economy, a low in the stock and commodities markets and highly optimistic sentiment readings. As a technician, I feel that the optimism is nothing more than false hope. There is little doubt in my mind that the November lows marked a low of at least intermediate degree. There is also little doubt in my mind that the November lows did not mark THE bear market bottom. Again, history has clearly shown that bear markets tend to run approximately one-third the duration of the preceding bull market. In this case, with the preceding bull market running some 33 years from the 1974 lows into the 2007 highs, the 13 month decline into the November 2008 lows did not mark the bear market bottom. Please refer to the November 28, 2008 Observation for more details in regard to bull and bear market relationships.
As I see it, this advance could easily last a while longer. This would in turn allow optimism to grow even further. As a result, more and more people will reenter the market. But, I believe that this advance is a bull trap and that once it turns down, the carnage will likely continue. Remember, the Dow theory primary bearish trend is still bearish and in accordance with Dow theory, until sufficient evidence develops to reverse the established primary trend, that trend must still be considered to be in force. Also, it is important to remember that bear markets have historically run one-third the duration of the preceding bull market. And, unless you think the new administration can somehow revive the markets to new highs once again, then the 13 month slide we have seen is likely only the first phase. The old-time Dow theorists say that the second phase is when the reckoning takes place. So, my point here is that it would be prudent not to get too caught up in the hype as this intermediate-term rally runs its course. That being said, I find the following quotes, which I have presented here in the past, so very appropriate once again and for the benefit of newer readers I wanted to include them here again.
“There is no cause to worry. The high tide of prosperity will continue.” –- Andrew W. Mellon, Secretary of the Treasury.
October 14, 1929
“Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board.” –- New York Times
December 5, 1929
“The Government’s business is in sound condition.” –- Andrew W. Mellon, Secretary of the Treasury
December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.” –- Associated Press dispatch.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.
January 21, 1930
“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.” – News dispatch from Washington.
January 24, 1930
“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.” – New York Herald Tribune.
March 8, 1930
“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” – Washington Dispatch.
May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover
June 29, 1930
“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.
August 29, 1930
“American labor may now look to the future with confidence.” – James J. Davis, Secretary of Labor.
September 12, 1930
“We have hit bottom and are on the upswing.” – James J. Davis, Secretary of Labor.
October 16, 1930
“Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.” – Charles M. Schwab.
October 20, 1930
“President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President’s special committee on unemployment.” – Washington dispatch.
October 21, 1930
“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.” – Washington Dispatch
“I see no reason why 1931 should not be an extremely good year.” – Alfred P. Sloan, Jr., General Motors Co.
January 20, 1931
“The country is not in good condition.” – Calvin Coolidge.
June 9, 1931
“The depression has ended.” – Dr. Julius Klein, Assistant Secretary of Commerce.
August 12, 1931
“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.” – The Nation.
July 21, 1932
“I believe July 8, 1932 was the end of the great bear market.” – Dow Theorist, Robert Rhea.
Tim W. Wood
© 2009 Tim Wood