Temporary Reversal or Beginning of a Bear Market?

Question -- Russell, after being bullish for months (since July 2010), a few days ago your PTI finally turned bearish. Do you think it was a coincidence or did your PTI really and accurately signal the big break in the market?

Answer -- I don't think it was a coincidence. Sadly, however, I must admit that my PTI does not tell us whether this is a temporary reversal or whether it is the beginning of a primary bear market.

For the answer to this critical question, I turn to other studies. One is the "Fanline Principle" that I illustrated on the August 5 site. Based on the fanlines, I believe this is a serious reversal to the downside.

Of course, I always take the Dow Theory into consideration. Here, it's mainly a matter of VALUES. The dividend yield on both the Dow and the S&P has dropped below 2.5%, always a sign of danger. Dow warned that unless there was some special reason, a stock yielding less than 3.5% was overvalued and should be treated with caution.

Another study which I take very seriously (I've been following it since the 1960s) is the Lowry's studies of Buying Power and Selling Pressure. Lowry's, based on a 78 year study of their daily statistics, insists that we are in a deep correction within an ongoing primary bull market.

The Bank Credit Analyst, being very careful, believes that the bull trend is still alive.

Joe Granville believes that the market is now positioned almost exactly where it was during July and August, 2008, just before the great collapse.

I could go on and on with the opinions of leading stock market analysts and advisors, but I don't know whether I could come to any worthwhile conclusion.

In the end, I think it best to rely on the charts. I particularly like point & figure charts since they concentrate the action, and often reveal patterns that are not visible on any other type of chart.

The chart below shows the D-J Industrial Average going back a year. Clearly, this is a monumental collapse. But it doesn't tell us whether it's the end of the collapse. My guess is that the market is ready for a rebound. The intensity and the quality of the rebound will provide the vital hints as to whether the collapse is over with -- or whether a bear market has started. By the way, bear markets usually start more subtly, with an initial downward zig-zag -- rather than a sudden "all-out" crash.

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