FSO Editorials: "No Bell Will Ring at This Bear Market's End" by Robert B. Gordon 12/12/2002

No Bell Will Ring At This Bear Market's End
by Robert B. Gordon
December 12, 2002

Bear markets end very quietly - with a whimper not a bang. They surely do not end with eager traders driving the marked-down prices of former market leaders to double and triple gains in a few weeks of a bear rally, as was happening recently. Nor do they end with Wall Street salesmen and mutual fund managers still recommending stocks and bonds for the short or very long term to clients with huge paper losses.

In a current Barron’s article, Steve Leuthold, gray-beard mutual fund manager, declared that the recent bear rally was in fact the start of a new bull market. I once held shares in the conservative growth fund bearing his name. It held a modest short position that provided downside protection in the new bear market. At that time I hoped this veteran manager really understood what was ahead and would continue the short positions, but I was very wrong. Soon after, the fund price started falling and I learned that the short position had been closed. Surprisingly, about that time, Leuthold started a 100% short fund, which has gained 66% since its start. In due time we will learn more about the success or lack of success of Leuthold’s new bullish market position.

I continue to be amazed at the huge number of presumably intelligent fund managers and investment advisors who continue to demonstrate no knowledge of the existence of the 60 year-old Elliott Wave Principle which completely explains the past, present and future action of our major market indices. Is it really ignorance or just their continuing need to sell their same old stocks and funds?

I entered the stock market in 1940 when the Dow was at about 150, down from its 1937 recovery peak near 200. From its 1932 post-crash low of 42, it had risen nearly 5-fold to the 1937 peak. After my entry, the market continued down to a low slightly under Dow 100 in 1942. This Is a range identical to the Dow dropping from 10,000 to below 5,000. I was very busy starting a new career and completely unaware of the Dow’s action. From this 1942 low, the Dow rose over the next 24 years and touched 1000 at the start of 1966. This was the longest bull market in the 20th century and nearly equal in gain to the later 1982-2000 bull market.

The mid 1960’s were the time of speculation know as the Go-Go years where the term Nifty Fifty was coined for the 50 "one-decision" stocks that needed only to be purchased and never sold. Few of those stocks survived the 1973-74 bear market, which leads me to believe the same fate awaits many if not all the favorites of the recent mania.

During the sixties a number of speculative mutual funds were born and went through a parabolic boom and crash scenario that, not known then, would prove to be a miniature version of the NASDAQ boom and bust cycle three decades later.

Completely unknown to me and most other investors with no knowledge of the Elliot Wave theory, was the fact that the1966 Dow peak was the beginning of a long so-called "trading range" market that lasted till the start in 1982 of history’s greatest-ever bull market and mania. A large SuperCycle Wave I rose from the ‘29 Crash bottom of Dow 42 in 1932 and topped at the Dow 200 peak in 1937. I now know that my market entry in 1940 coincided with the midpoint of corrective Wave II which ended in 1942.

After SuperCycle Wave III topped in 1966, there were 4 more times the Dow topped near 1,000 and bottomed in the 570 to 800 range. The 16-year period of 1966 to 1982 formed SuperCycle Wave IV. The market low in current dollars was in December 1974, but in inflation-adjusted dollars was in 1982. By 1982, the Dow had lost 74% of its value in inflation adjusted dollars since the 1966 top. The double-digit inflation in the 1970‘s caused a completely hidden, huge bear market. To my knowledge, this "stealth" bear market was never revealed in the financial press of the time. I first learned about it from reading Robert Prechter’s great book "At the Crest of the Tidal Wave" in 1995.

I use this heading only to make one big point, namely, we now know the 1973-74 event to be small compared to the current greatest-ever bear market. But our Wall Street friends are eager to make comparisons with this bear market and never ever make them with the previous "Big One" - the 1929 Crash!

For a full discussion of the mid-1970’s event, please read my previous essay titled "The Education of an Investor". For all investors active at the time, the bear market was long and scary. In that period of my life I was in my pre-retirement years, struggling with double-digit inflation and trying to build my retirement assets. I was subscribing to a weekly service called the Indicator Digest which published an Un-weighted Average (IDA) of 3000 NYSE stocks.

As described in detail in the referenced essay, each weekend over the full bear market period, I hand-plotted a large chart of the IDA price and the two and eight-week price moving averages (equivalent to the 10 and 40-day averages). With that great tool, I was able to detect and time every single bear market price drop and rally. It was a wonderful pre-computer, pre-internet tool that proved conclusively that any investor using simple tools can "Time The Market." But all of our Wall Street experts continue to tell us that timing the stock market is impossible. They are either ignorant or fools. Timing the major market cycles is the essence of profitable investing.

Conventional wisdom about the1973-74 bear market is that the major indices went down 48 to 50%, but the Un-weighted IDA index went down 63% and its bear market started in early 1972, not in 1973, when the weighted averages declined. Major mutual funds dropped as much as 70 or 90% and there were net fund redemptions for at least nine more years.

I thought it would be of interest to describe how a present-day investor could readily time the ups and downs of the current market with available computer software. My unbelievably tedious manual process in the 1972-75 market was described above and in greater detail in the referenced essay. My three years of hand-calculated and plotted data probably took at least forty total hours of effort. Using an existing computer database of daily mutual fund prices and modern software, I did a comparable study over the life of this bear market in less than 10 minutes. Here is a description of the process using my FastTrack program. [See www.fasttrack.net for information.]

Moving Average		% Gain from			% Time in	No. of
Short	Long	Short	MM	Total	Short Fund	Sw./Yr
10	40	82.1	11.3	91.4	63.0	3.0
9	36	96.3	11.3	107.2	63.3	3.0
11	44	75.0	11.3	83.5	63.4	3.0
9	34	100.1	11.3	111.4	63.4	3.0

The FastTrack software program was invested in the reverse index short fund when the short moving average was above the long moving average and in the MM fund when the short moving average was below the long moving average. The computer program was designed quite a few years ago and does not have the ability to compute the gain of long funds sold short. But it does a great job of totaling the gains of a short fund held long as indicated above.

So, the next time you read or hear some "expert" tell you the market cannot be timed, it will be due to one of two reasons. Either he or she does not know how to time the market or they are lying through their teeth. That is the explanation for short-term timing. But for all long-term market moves, the one and only proven tool is the time-tested Elliott Wave Principle. Sixty years after its discovery, most Wall Street analysts continue to display gross ignorance of Ralph Elliott’s great work.

My memory is failing, but my 1971-1975 price chart of the IDA average shows that the final bear market drop ended in December 1974 and was followed by a rather sharp rally that lasted into June of 1975 based on my simple 2 and 8-week moving average timing signals.

In December of 1974, I was commuting to Manhattan by train from Connecticut each day. Passengers were still reading The Wall Street Journal, but I cannot remember any great interest in the contents. In my daily short ride on the subway, I cannot recall even the slightest mention of the Market or of Wall Street. Remember that, completely apart from the stock market, there were huge concerns about the economy and the high level of inflation.

Of course, there was very low public participation in the stock market during the 1970’s. The great majority of people who had been adults in the 1920’s were not brought into the market during the Go-Go Sixties. The huge growth period of the mutual fund industry had not yet begun. There were no personal computers, not even electronic hand calculators. I computed moving averages on my engineering slide rule. We had TV and magazines like Fortune, but nothing like Money. We had The Wall Street Journal and Barron’s, but no CNBC or Internet. The great Wall Street selling machine worked primarily through their vast chain of local brokerages spread throughout the nation. For the great majority of investors, their local personal broker was their prime source of advice and information on the stock market.

It is true, based on all of my knowledge, that the bear market and Depression after the 1929 Crash would have continued indefinitely if it were not for the great economic intervention and impact of the second World War. One of my strongest memories from the 1938 time period was that, during a family gathering, a well-educated and informed uncle stated that there appeared to be no way to end the Depression. There was a great amount of public and private despair that quickly changed after the Pearl Harbor attack.

It is also very true that the U.S. was much better prepared to withstand the severe problems of the post-crash era. Consider that the U.S. was a creditor nation - not a debtor as now. Public and private debt levels were modest compared to now. Our nation had 20% of its people living on farms vs. only 2% now. Only a few percent of the population were invested in stocks. Home life was stable with nearly all wives at home taking care of their children. Try as I might, I cannot find any significant areas of our public and private life that are not in poorer shape today than in the 1930’s.

The few very old bears like me and the many younger ones, who follow the Elliott Wave Principle, know that this bear market is very young. In the simplest words, there is just too much bullishness. Virtually every "expert" on Wall Street is still recommending a large allocation to common stocks either to take advantage of each recurring bear rally or for the "long term." The equity mutual funds are still heavily invested in their favorite stocks despite absorbing huge losses in recent years. Their cash reserves are still at bull market levels.

All types of stocks are still selling at "obscene" sky-high valuation levels. They are still far above so-called normal levels, but the experience of all past bear markets is that stocks do not bottom at normal levels. They eventually bottom as far below normal as they previously were above normal levels. Corporate reported profits are still full of accounting tricks and Wall Street analysts are still forecasting future profits through very rose-colored glasses.

In his December issue of the Elliott Wave Theorist, Robert Prechter chose as his title "Yet Another Selling Opportunity in the Making." A chart on the front page is titled "The Slope of Hope." It is a chart of the S&P500 index from January 2000 to date. The chart clearly shows that there have been 9 substantial bear market rallies to date. In each and every one of these rallies, including the latest, standard measures of investor optimism were at or near all time highs.

Later in this excellent report, Prechter shows a remarkable 80-year logarithmic price chart of the Dow index with parallel trend lines connecting the 1937 and 1966 market peaks and the 1942 and 1974 market bottoms. It clearly shows that Dow broke above the upper trend line in 1995 at the start of the market mania and, astonishingly, is still today above the upper price trend line. Prior to the recent bear rally, the Dow chart had briefly fallen below the upper line. Prechter’s conclusion is that the real bear market with prices dropping to the lower trend line, or below, is still to come.

In another striking chart titled "Collapse Ahead", Prechter showed a chart of the S&P500 index from the 2000 top to this date, marked "you are here", and then extended the chart to his estimate of a future market bottom at a far lower level. This grim forecast is understood today by a very small number of disciples of the Elliot Wave Principle.

No one really knows the answer to this question. The best thing we can do is to try and make intelligent guesses. One thing is quite sure; it will not reach its ultimate bottom 3 years after its peak as occurred in 1932. The Dow did not again reach its 1929 peak level until 1945 when a new bear market had finally begun. In 1929, the wave that peaked was Wave I of a seventy-one year-old SuperCycle Wave, whose final Wave V ended at the beginning of 2000. This date also marked the end of Grand SuperCycle Wave III, one level higher in the Elliott Wave hierarchy.

It is reasonable to assume from its higher EW level, that the current on-going Wave IV bear market will be greater in depth and duration than the decline after 1929. In fact Robert Prechter has predicted that this bear market may well last to the end of this century. And, if his expected wave form holds true, there will be more than one bottom, perhaps two or three, with intervening market rallies that will be considered by most observers as new bull markets. The long-term price chart would be in the form of an extended triangle and be equivalent to, but much larger than, the trading range market from 1966 to 1982.

There has been much speculation among experts about whether the current U. S. bear market will follow the pattern of the 13 year-long bear market scenario in Japan. There is a resemblance in the behavior of the preceding stock market bubbles and in the first 3 years of both bear markets. But there is an ominous difference. In Japan their huge real estate bubble burst two years after the stock market peak. This is in line with the history of previous real estate cycles in this country. Although many experts expect the U.S. housing bubble to eventually burst, it is being fed by an enormous credit bubble created by the drastic interest rate reduction policy of the Federal Reserve. It is too early to predict how the fate of the current housing bubble will effect the on-going bear market in stocks. It is clearly a huge question for the future.

The general bullish view is that (1) the economy is recovering from a minor recession and it will soon be over, that (2) the stock market will soon recover and (3) the debt and housing bubbles are not problems either now or in the future.

The bearish view, to which I subscribe, is that both the bear market and economy will become far worse, that we are heading into an extended economic downturn in the manner of Japan, and that the credit and housing bubbles will eventually burst with disastrous results.

I feel much more comfortable with this question due to my full-time market experience in the bullish 1960s and especially in my detailed, week-by-week plotting experience in the quite severe bear market from 1972 through 1975.

I expect the current general bullish attitude to change radically as the major indices continue to drop to new lows. If there is a very sharp price sell-off at some point, causing a real investor panic and massive redemptions of funds and stocks, the change in attitude from bullish to bearish will occur very fast. If no panic occurs, the change in attitude will be slower, but the final result will be the same. No bear market will ever end until essentially every bullish investor has forsaken the stock market. I can understand how investors whose only experience was in the 1980’s and ‘90s will have a hard time understanding and believing my last statement. I cannot predict how long the process will take, but it will surely occur.

With or without a sharp panic, mutual fund redemptions will eventually reach very large levels, exceeding all previous records. The number of mutual funds will drop very sharply through mergers and outright closings. Employment in the overall financial services industry will decline to low levels, perhaps as low as ten to twenty percent of the present.

Due to the large drop in ownership of stocks and funds, advertising levels will fall and threaten the existence of CNBC and financial journals and magazines. I expect Lou Rukeyser to sink into obscurity at some point. These trends have already started and will get much worse. Major brokerage houses and even the exchanges will be affected by massive cutbacks. All of these events occurred to a very large degree in the 1930’s when only 5% of the population was in the stock market versus more than 50% now. So there are many good reasons to expect the effects this time could be even more severe.

Trading volume will decline rather sharply on all exchanges. Blue chip stocks will drop to levels that are now unbelievable. Many taxable and tax-free bonds, once highly rated, will default on their interest payments. Junk bonds may become wall paper. At the bottom, IPO’s will be non-existent or very rare. Cash investments will be popular so long as inflation remains fairly low, but when there is a serious threat of inflation, precious metals will soar.

Finally, I suspect that the investing masses will be long gone from the scene when the bear market ends. A small group of Elliott Wave followers will still exist and have the knowledge to prepare for the next bull leg. The Wall Street Journal may still be publishing to a greatly reduced readership, but Barron’s and the financial section of most newspapers may have disappeared. I choose not to predict what AOL and Internet will be doing when all of the above events have occurred, but I am sure that Microsoft and Windows XYZ will be here.

But do not despair, some day a new and greater Wall Street establishment will rise from the ruins of the old. A new generation of investors will be born and become buyers of Wall Street’s offerings. The stock and bond markets will grow and expand. A great new bull market will be born. The grand old boom and bust cycle will start again, but I think it will be a very long time in the future and few of my readers will be here to participate.

"Slope of Hope" chart used with permission to Financial Sense from EWI.
Other charts may be viewed in Jim Puplava's Market WrapUp for November 27, 2002.