Dow has never seen a bear market

The concept we are going to cover could anger some people with entrenched views and by the way this article is not against Gold. What one needs to remember is that Gold represents a sector of the market and no sector can trend upwards forever.  Hence, the Dow is likely to trend upwards far long than Gold in the long run.

We performed a search on the net and found several definitions for a bear market. Rather than list them all here and waste time and space, we will conclude by saying: there is no standard definition for a bear market. So it is open to interpretation, just as is almost everything in the financial arena.

We have chosen to define a bear market in terms of the  “The Trend is your Best Friend” concept.

Using this definition, we  can make the following assertion:

First and foremost, the Dow is technically not really in a bear market yet. I am a firm believer in the simple principle of the “Trend is your Friend until it Ends”, and I must admit that I initially made the mistake of calling this a long-term bear market (secular)in a current cyclical bull phase. However, upon examining very long-term charts, I have to take back that call.

Dow has never been in a true bear market

Looking at the trend, we see the super primary trend of the Dow is still intact. In fact–get ready to hold your breath–we would have to break below the 1500 level to say the super long-term uptrend is over.

If one looks at any stock, it usually has three stages: the super primary trend and then 1-3 more branches before it corrects. At this point, it can fall back to the main trend line and then slowly return to its old former highs and even surpass them or completely vanish from the face of the earth. Looking at the Dow, you will notice that it has had four branches in total, which is rather extreme.

The market overextended itself to the maximum point, and it’s only logical that it should regress back to the mean. Since the upward move was so outrageous, it follows that the downward move should be equally outrageous.

So far we have just broken below the 4th branch, which is entirely understandable and expected since the market had reached insane levels. But take a look at the chart. We could not even break below the 3rd uptrend line, nor even touch it. This means that this market still has plenty of life in it, and all it did so far was wring out a fraction of the excesses in it. The NASDAQ had a more severe correction, and the reason is simple: the NASDAQ went from a place where one speculates to a place where individuals started to speculate as if they were under the influence of a potent hallucinogenic drug.

Take a long-term look. This pullback has been rather mild and in reality, nothing to be worried about yet. The new thrill-seeking investors, who were so busy getting high every day as they saw their portfolios soar in value every single week, got smashed with a super dose of reality when the market decided it was time to take a breather and rid itself of some the excesses. And since the NASDAQ was the place where speculation was the most rampant, it follows that it should also be the place where the correction would be the strongest and the fastest.

We have not even touched 7,000 nor breached it. Had we done so, this would have indicated further weakness. If we had breached it, we would have to break below 5,000 to invalidate the second main super uptrend line.

So where do we stand now? If you look closely, it sounds like we are in the process of completing a wedge formation, which will be very bullish if we break out of it. Also, we are slowly making higher lows, which is another bullish indicator. Another major bullish indicator is that for over six months now the number of new highs has seriously outpaced the number of new lows. This shows that the internals of the markets is improving and getting stronger.

What is fascinating is that Gold is also putting in a beautiful wedge formation when priced in South African Rands, which adds further credibility to the theory that the Dow is doing nothing but adjusting to the high level of currency inflation.

So in the short-term, it looks like Gold and the Equity markets can keep chugging up, however, Gold will be the final Victor since it has just begun its major uptrend.

I believe with the above data one can draw the following conclusions:

A pull back to the 8,800 to 9,000 area would be very healthy for this market. However, it is not necessary. If we pull back to even 9,400 to 9,500, it will serve the minimum criteria to provide the necessary ingredients to start the next phase of this rally. So far there is nothing incredibly spectacular about this rally when one looks at it regarding a stronger currency.

In summary, most of the move was due to a currency adjustment: the US dollar getting hammered to death and the markets just adjusting to reflect this inflationary process. (You can’t expect the market to stay at the same level if several hundred more million or billion dollars are chasing the same number of stocks.)

If we can hold in the 8,800 to 9,000 range, then the outcome looks rather interesting. Esoteric cycle analysis (our proprietary indicator at the Tactical Investor) is suggesting the following targets if we can hold the above ranges:

1st target will be a break of the Dow over the 10,000 range
2nd target 10,500
3rd target 11,400
Extreme target 11,7000

Then we start the process that I call the crash and burn as the market corrects and comes back to a normal level. But before it does, an insane level of pain has to be felt. So when all is said and done, this market could end up in the 1,500 to 4,000 point range.

As we are living in unpredictable times, it would be prudent to own some gold and silver bullion

As John Maynard Keynes puts it, “Markets can remain irrational longer than you can remain solvent.”

And if you are nervous about the markets, then listen to Mark Twain:

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Mark Twain 1835-1910

If you claim to be a contrarian, then at the very least you can take the time to look at what I have to say. Understand that I am not pushing these opinions down your throat, but only providing other possible scenarios from the ones most of you have been given to date. Don’t shoot the messenger just because he is delivering a message that does not fit into your pre-built expectations scenario.

Other Articles of Interest

Why market crashes are buying opportunities

A clear Illustration of the Mass Mindset In Action

Inductive Versus Deductive reasoning

Mass Psychology Introduction

Mass Psychology Part I 

Mass Psychology II,

Mass Psychology III 

Comic Strip Illustrating Mass Mindset

Mass Psychology or Contrarian Investing

 

  • jaazee

    Interesting, and agreeing with most of your comments. Let “the trend be your friend” has been great advice to traders. From a longer term perspective, “Don’t Fight The Fed’ has been ignored by many “old guys”, like me who could never guess that a rational Fed would keep rates near zero for this length of time.
    The economy actually bottomed the summer of 2009 but “planned” (in my view) irresponsible lack of sound fiscal policy put “it all” on the Fed who has been the best friend Obama’s political career ever had.
    Presently, there are Trillions of dollar value invested in “negative return investment!” It’s a “no brainer” to buy a vault and load it with cash & gold for a better return.
    In that regard,the Chinese are actually purchasing the largest “gold vault” in history from Barclay’s, other than the pyramids.

    The torch is being passed to the next world Empire.
    China strategy to dominate the gold market.
    http://read.bi/22fecnI