Yes, I Called for a 1930's Style Decline for Equities in 2008 Before it Happened

Here are a few quotes from the commentary section of recent Research letters. Understand that the detailed analysis and charts have not been included here. Also, what you see below is only representative of portions of the commentary section on equities.

June 2008:

"In accordance to classical Dow theory, the longer-term bearish primary trend change that was confirmed on November 21, 2007 still remains intact. From a cyclical perspective, I continue to believe that the January 22, 2008 low most likely marked the 4-year cycle low. We are also now approaching an extremely important statistical hurdle for the equity markets and if higher prices aren’t seen after July, then the statistical implications turn very very bearish. So much so that such a failure would be suggestive that the 4-year cycle top may have already been made.....Should the decline into the coming trading and 22-week cycle low violate the January low, which statistically should not happen just yet, then it could be that the 4-year cycle advance has failed sooner rather than later. The price action over the next couple of months is statistically extremely important and has far reaching implications...."

"I want to add that if the market were allowed to fully exhaust what I belief was the beginning to a bear market back in 2000, we would now be coming out of that bear market. Instead, this bull market has been extended and as a result, we have an old and fragile bull market potentially still intact, at least this was the case as of the October 2007 top, and we still have a huge bear market to deal with...."

"Ultimately, I always follow my statistics while allowing my cyclical work and my ever so important Cycle Turn Indictor to guide me. But, as I look at this overall setup I can’t help but draw conclusions or expectations in regard to what I THINK may be happening. The key is not to get married to what you think and to allow the statistics, cycles and the CTI to guide you and to either prove or disprove your longer-term views.

That being said, I want to give you my current longer-term perspective on how I think things may now be lining up. In doing so I want to first state that just as I have said all along, I believe that when the equity markets peaked in 2000 we entered into a long-term secular bear market that marked what I believe was or should have been the natural top for the bull market run from the 1974 bottom. But, the powers that be wanted to "help." So, they began to "manage" the economy. In doing so, they were able to manipulate public confidence enough to pull the equity market out of the grip of the bear. However, as I have also been saying all along, these efforts would only serve to make matters much worse in the end. Well, in the wake this financial experiment the equity markets were revived, a housing bubble was created and we all know the ongoing consequences of that. Also as a result of the irresponsible inflationary manipulative efforts of the "geniuses" in charge of this financial experiment and manipulation of public confidence, they added fuel to the longer-term commodity cycles that naturally bottomed in and around the 2000 to 2001 timeframe. But, in addition to that all of the hot money around the world has jumped on the speculative bandwagon with commodities as well. As a result, we have commodity cycles that were moving up naturally, but their advances have been exaggerated. The extreme we are seeing in commodities is just like the tech bubble and the recent housing bubble, which Greenspan denied existed. I believe that we now have a commodity bubble that will ultimately end the same way and because of the pain that rising commodity prices have placed on the economy, there is a very good chance that the stock market is setting up for an implosion as well.

Rather than "taking the medicine" back in the early 2000’s the Fed chose to "fix" things, but in reality things are now much much worse. The housing market will not recover for years to come. The banking crisis that has resulted from the fallout of the housing bubble is not over. We now have commodity prices hitting the consumer very very hard and we have a very mature and fragile bull market that is now some 33 years old. This is a much worse situation than we had when equities turned down from the 2000 top and any further efforts at this time, should they continue to be effective, would only make matters even worse. Basically, I think we have hit or at the very least are nearing the point in which any further efforts to "manage" the economy and to manipulate the public’s confidence will not work and will be followed by total financial disaster.

I think that there is a reasonable chance that commodities will top within the parameters discussed above and if so that bubble will soon burst just like tech and housing did. As widespread as the exposure appears to be on the long side of commodities any such top would likely have serious financial implications, just like housing did. On top of that I think there is a reasonable chance that we are setting up with a left-translated 4-year cycle in the equity markets, which is pretty much a direct result of the pain inflicted on the economy by rising commodity prices and the monkeying around with the economic cycles. If so, the end result will be that all of the manipulative and mind controlling efforts seen since 2001 will in fact no longer matter. If so, we will move into a long and contracted bear market that will run some one-third the duration of the great bull market advance that began in 1974.

If such a scenario should occur, then the equity markets will be at great risk of making the 4-year cycle top within the *** month mark, which is ***. But, nearer term the equity market is at risk of that 4-year cycle top occurring along with the coming ***cycle top, which is ideally due no later ***. The bottom line is that should the current 4-year cycle advance top out in *** or less, then statistically speaking we should expect to see the Industrials down in the *,200 range and possibly even lower as the next 4-year cycle bottoms...."

July 2008:

"Long-term, the Dow theory bearish primary-trend change that was confirmed on November 21, 2007 still remains intact...."

"There were some, who do not truly understand the Dow theory, suggesting that the primary trend turned up in April when both the Transports and the Industrials moved above their February highs. I stated then that this was not correct and with the recent price decline there should be no doubt that my assessment of the Dow theory was in fact correct.

According to classical Dow theory, in order to turn the primary trend back up, we must have a joint move above the previous secondary high points. I have stated all along that the January/March lows marked the last secondary low point and that the February highs did not qualify as having marked a secondary high point. Therefore, the move above the February highs were of no consequence from a Dow theory perspective. The current Dow theory chart can be found at the top of page 3.

I have also maintained that the secondary high point would occur in conjunction with the intermediate-term peak, which was anticipated and confirmed to have occurred in May on the Industrials and in June on the Transports. In order to nullify the existing primary bearish trend, once the coming secondary low points are established we will then have to see a daily close by the Industrials above their May closing high and by the Transports above their June closing high. Should this occur, we will then at that time have a bullish primary trend established, which will serve to keep the longer-term bull market that began in 1974 alive. It is erroneous to think that both averages will have to move above their all time highs in order to establish a bullish primary trend. It is price movement above and below previous secondary high and low points that is critical.

Failure of the averages to close above their recent May/June closing highs as the rally out of the now due secondary low points begin would constitute a failed rally that would then be expected to move even lower. Should this occur, the existing primary bearish trend would be reconfirmed with a daily close back below the secondary low points that are now being established. This would then in turn suggest that the bull market, which began in 1974, may have come to an end and that we now have THE bull market top in place. If that proves to be the case as we move forward, then the bottom of the bear market would not be expected until ***. It is for these reasons that the developments over the next couple of months are so important...."

August 2008:

"Long-term, the Dow theory bearish primary-trend change that was confirmed on November 21, 2007 still remains intact.... From a long-term cyclical perspective we must continue to operate under the assumption that the 4-year cycle low occurred at the January/March lows. Reason being, that low occurred first and we do not yet have sufficient evidence to prove otherwise. Understand that if the 4-year cycle low did in fact occur at the January/March lows then we now have a failed 4-year cycle in place and the only other cyclical setup like this I can point to occurred in 1930...."

"A break below the July 15th low would be indicative that we have a very left-translated and a failed 22-week cycle in place. This would then set the 1930 cyclical setup into motion...."

"According to classical Dow theory, the primary bearish trend change that occurred on November 21, 2007 still remains intact. The current Dow theory chart can be found at the top of page 3. More recently, as the averages advanced out of the January/March secondary low points and into their May/June secondary high points an upside non-confirmation was born. From those highs the averages declined down into the recent July lows. It is my belief that these lows should ultimately prove to be lows of secondary degree. I say this because I have found that secondary low points in accordance with Dow theory tend to correspond with 22-week cycle lows. For clarification, please understand cycles have nothing to do with Dow theory. Nonetheless, given that the July lows marked the most recent 22-week cycle low this should have corresponded with having marked secondary low points in accordance with Dow theory.

Now, just as with cycles, the test now at hand is how far the rally out of these secondary lows goes. If the averages should muster up enough of a rally to carry them above their May/June secondary high points, then the primary bearish trend change would be reversed as we would then have a primary bullish trend change. This would also point toward the July lows as having marked the 4-year cycle low. In which case, the Dow theory, statistical and cyclical implications all turn much more bullish. However, failure of the averages to better their previous secondary high points, followed by another intermediate-term sell signal, per the weekly Cycle Turn Indicator, then the primary bearish trend will remain intact and the stage would be set for yet more weakness. Then, any violation of the July lows would serve to reconfirm the November 21, 2007 primary bearish trend change. This would also tend to point toward the January/March lows as having marked the 4-year cycle lows. This would also suggest that we now have a failed 4-year cycle at play, which would be a very similar setup to 1930."

"There is a reasonably good chance that January marked the 4-year cycle low and that we now have a very left-translated 4-year cycle at play. In fact, when I look at the balance of the evidence it tends to tip the scales slightly in this direction. If this is in fact what we are facing, the last time a similar setup occurred was 1930. In that case the 4-year cycle advanced 5 months and retraced some 49% of the decline out of the 1929 4-year cycle top. That 5-month advance also consisted of one and a half intermediate-term 22-week cycles up. Then, once the 4-year cycle turned down the initial decline into the first 22-week cycle low after the top held above the 1929 4-year cycle low. The market then bounced and the crash was in full swing. The overall decline from the 1930 4-year cycle top was 86%.

Assuming that the January low marked the most recent 4-year cycle low, the advance into the May 4-year cycle top only lasted 4 months, but retraced some 58% of the decline out of the 4-year cycle high. But, structurally this setup could be much weaker because there was only a single 22-week cycle advance out of the January low and now with the decline out of that top the previous 22-week cycle low, which potentially was also the 4-year cycle low, has been violated. If this is in fact what we are dealing with, I can tell you that since the inception of the Dow Jones Industrial Average in 1896 there has never been a cyclical structure this bearish. It is because this is such a potentially extreme setup that I feel we must be very cautious in terms of the potential economic destruction we could be facing..."

March 2009

Based upon the current phasing of the market, there should still be at least one additional leg down into the March trading cycle low. As explained in the Bottom Line section at the
beginning of this newsletter, the coming trading cycle low will mark the first of two opportunities for the intermediate-term low. All we have to do is watch the developments surrounding the trading cycle low to see if it further evolves into marking the intermediate-term low or, if it shows signs of failure and in this case there will be another leg down into the May timeframe, which should finally mark the intermediate-term cycle low. The important thing for you to keep in mind here is that once the intermediate-term low
is made, we should then see a more meaningful bounce in the stock market. Reason being, the coming intermediate-term low should ideally also mark the seasonal cycle low. Given that the last seasonal cycle low occurred in January 2008, the rally out of the coming seasonal cycle low should be more in the order of what was seen between January 2008 and May 2008. But, this rally should still ultimately prove to be a bear market rally. However, because of the potential magnitude of that rally it is not something I would be willing to sit on my shorts through. In fact, the advance out of the seasonal cycle low should be a much more meaningful trading event than what was seen out of the November 2008

April 2009

...based on current evidence, it appears that the more recent March 6th low likely marked a slightly early 22-week cycle low, that any weakness should hold above the March 6th low and should mark a buying opportunity. I also suspect that the March low marked the seasonal cycle low was well. If so, this means that the March low was one degree higher than just the intermediate-term 22-week cycle low and as a result this sets the stage for the rally to have a bit more staying power. Based on the overall cyclical picture, we now have the opportunity for a multi-month rally. Whether or not the market can capitalize on this cyclical opportunity is the question. Stay tuned to the short-term updates for developments.

The price action the week of March 13, 2009 completed the formation of a weekly swing low that was confirmed by an upturn of the weekly Cycle Turn Indicator the following week. As a result, an intermediate-term buy signal was triggered. Until evidence to the contrary develops, we must continue to operate under the assumption that the March low marked the most recent intermediate-term cycle low.

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