Ever since the rally out of the March 2009 low began, I have maintained that it has been a bear market rally. All the while, the politicians think that their printing spree, bailout plans and stimulus packages have put a bottom in the economy. I continue to hear the talking heads on "CNBS" cheering on the public, and in their eyes all they can see is the so-called "double dip" recession. I’m sorry folks, but this is not a double dip recession. According to my analysis we have entered a global debt crisis in association with K-wave winter. Besides the purging of debt from the system, a by-product of K-wave winter is that we have also entered global bear markets in stocks and commodities. Based on my analysis, the rallies that began in early 2009 have not been associated with a recovery, but rather a reprieve of the ongoing deflationary forces of K-wave winter.
In accordance with Dow theory, bull and bear markets are divided into three phases with each of these phases separated by important counter-trend moves. The counter-trend moves separating these phases are very deceiving because people perceive them as being a resumption of the previously established longer term move rather than a counter-trend move within the newly established trend.
In the current case, most people perceive the 2009 low as THE bottom and the advance that has followed the March 2009 low as being a resumption of the advance that carried the markets into the 2007 highs. Based on the ongoing evidence associated with my analysis, this is not true. According to my analysis, 2007 marked the top of the 33 year longer-term bull market that ran between 1974 and 2007. Also according to my research the rally that has followed the 2009 low has been the deceitful counter-trend move that will ultimately prove to separate Phase I from Phase II of the much longer-term secular bear market. Historically, Phase II declines are the most devastating and I see no evidence that this time will be any different. I have discovered a very specific "DNA Marker" that has been associated with every major stock market top since the inception of the Dow Jones Industrial Average in 1896. When all of the pieces of this DNA Marker are in place, the market will be at great risk of the resumption of the ongoing secular bear market and the decline into the Phase II low. Virtually no one understands the destruction that will follow in the wake of the Phase II decline. It is the reckoning of the seriousness of the situation associated with Phase II declines that make them so devastating.
As was seen during the Phase I decline, everyone will again turn to the government to "fix" the problem. Funny thing is, the government was instrumental in causing the problem in the first place. Furthermore, the appearance that the government created the bottom in 2009 is an elusion. The government does not know any more about fixing the economy than they do about fixing the oil leak in the Gulf. All the government can do is spend more money and create more red tape. The best thing that could happen would be for the government to stand back and let the free markets do what they will eventually do anyway. Based on the historical relationships between long-term secular bull and bear markets, the bear markets tend to run about one third the duration of the preceding bull market. Thus, with us less than 3 years from the 2007 high, this secular bear market has much further to run. Based on the historical relationships a bottom is not likely due until late in the current decade. For more on historical bull and bear market relationships please refer to the April 30th Market Observation.
Below I have included the current chart of the Industrials and the Transports. From a Dow theory perspective, the bullish primary trend change associated with the bear market rally still remains intact.
According to Dow theory, confirmation of a primary trend change requires a joint move above or below a previous secondary high or low point. This has not yet occurred. But, when it does and if the DNA Marker that I have identified at every major top since 1896 is also confirmed, then at that time the DNA Marker will serve to validate Dow theory. This will in turn then put the market at great risk of a far more devastating decline than most anyone anticipates. The bottom line is that the Phase II decline is lurking and there is analysis and there are tools to help understand how the setup is unfolding. Just as I warned about the decline into 2002, the extended 4-year cycle into the 2007 top and even the 2008 top in commodities, few listened but later wished they had. You have been warned!
