Bear Market History: Buy The Bear Sell The Euphoria

Bear Market History

Bear Market History

What I am about to say could possibly anger some people with entrenched views and some might even attempt to state that this article is against Gold. This article is not against Gold. In fact in the short term, both Gold and the Dow can do well. Long term, Dow will lose.

I 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, let me 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.

I have chosen to examine bear markets in terms of the concept of “The Trend is your Best Friend.”


Bear Market History: Experts fixate on the Bear& forget the Birth of the New Bull

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.

Looking at the trend, we see the main super 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 up-trend is over.

If one looks at any stock, it usually has 3 stages: the super main 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 former old 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 4 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.

In an earlier essay titled Federal Reserve’s Game plan, we illustrate how the Fed’s easy money policies created this hyper-frenzied Bull market. Bear markets give birth to new baby bull markets and the Fed ensures this outcome.

So far we have just broken below the 4th branch, which is fully 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 up trend 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 serious correction and the reason is simple: the NASDAQ went from a place where one speculates to a place where one started to speculate as to if one was under the influence of some very strong 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 up trend line.

So where do we stand now? If you look closely, it looks like we are in the process of completing a wedge formation, which will be very bullish if we break out of it. In addition, we are slowly making higher lows, which is another bullish indicator. Another major bullish indicator is that for over 6 months now the number of new highs has seriously outpaced the number of new lows. This shows that the internals of the markets is actually improving and getting stronger.

What is very interesting is that Gold is also putting in a nice wedge formation when priced in South African Rands, which adds further credibility to the theory that the Dow is really doing nothing but adjusting to the high level of currency inflation. I spoke about this is in my previous essay, Insanity is Prevalent.

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.

From the above data one can draw the following conclusions:

A pullback 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 would serve the minimum criteria to provide the necessary ingredients to start the next phase of this rally. So far there is nothing extremely spectacular about this rally when one looks at it in terms of a stronger currency. Look at my previous discussion on this subject, The Dirty Secret Behind the Gold Markets.

In summary, most of the move was due to a currency adjustment: the US dollar getting hammered to death and the markets simply 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. The trend indicator 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 sane 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.

Of course, one major terrorist event and the market will go to hell. No timing system can account for some insane fanatic’s actions. (Hence the necessity to hold even more 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 consider taking a few moments to consider this alternative view. 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 provided to date. Don’t shoot the messenger simply because he is delivering a message that does not fit into your pre-built expectations scenario.

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