Market Indecision & China Comment

     I observe see that the Big Money Breadth Index compiled by Richard Russell  of Dow Theory Letters is showing great strength while the A-D line has been weakening by showing resistance to making new highs. New highs in the DJ Industrials and S and P 500 confirm that the blue chips are currently the predominant Indexes. Does this indicate that the next rally, assuming it comes before a major decline, will be one led by the blue chips with the majority of stocks lagging? In the past, this has been a formula for the creation of major market tops. One thing I have puzzled about is how the type of scenario described above comports with the observation that a major rally in "cats and dogs" also is the harbinger of a longer-term market peak. Can the "cats and dogs" experience an upside explosion while the A-D line is weakening?

     Of course it is quite possible that the A-D line, which has led the market up since the March 10, 2009 lows, is simply undergoing a much-deserved consolidation after which it will resume its strength. I hope that this is the case for it would portend a longer extension of this mini-bull market. This uptrend is drawing closer to equaling in length the 1970-1973 mini-bull advance, which has been a sort of longevity benchmark for me.

     Simply because it has such a large population, it is well to remember that China needs to surpass the US in absolute GDP just to raise its per capita income closer to that of the "developed" nations . Especially ironic for a "Communist" country, China has huge disparities in the distribution of wealth.

Emerging From Correction

      The action of the last 3 weeks is exactly what I was hoping for. That is, the market is slowly working its way up toward the June highs in a steady, "consolidating" manner. There will probably be a DJT non-confirmation which will result in a sell-off to relieve the overbought situation by sending the McClellan Oscillator back down towards the 0 area. Then a little sideways action will occur in the area of the short term decline lows. Then I would hope for more strong upside action up to the April 26 highs. Then, some corrective action should transpire which will create a head and shoulders or "saucer bottom" for the major averages. This latter action would be taking place in the late summer/early fall time zone which is a weak seasonal period.
    Then in the strong seasonal period I would hope for a powerful rally to take the market in the direction of its 2007 highs.  This rise might be the conclusion of the mini-bull, but it is going to be a challenge to correctly identify the final top, which could occur in the late spring or summer of 2011. Interestingly, the S and P 500 is also currently lagging the DJI while the A-D index has already soared well above its June high area. The McClellan Summation Index is showing a classic rising pattern out of the area of its recent lows. So this market is essentially being led primarily by the A-D index and secondarily by the DJI.
     The discussion on whether the market reacts to news or is always looking ahead to something else is an interesting one which I may write up on Unraveller's Spool in the future.
                                                                             

A-D Ratio Strength

     Some analysts have stated that the A-D has been weaker than the Dow for a couple of months and that this is an evil harbinger for the market, meaning that a rally that has only a relatively few large cap stocks advancing while the majority of issues languish is a vulnerable market. If that were actually the case, it would be a precarious situation. I would describe the market action/price relationship between the A-D line and the Dow like this: On April 23 the Dow and the A-D line both made new highs. The next trading day, the 26th, the Dow was unchanged while the A-D was slightly lower. On May 3 the Dow completed the right shoulder of its its 2 1/2 week Head and Shoulders pattern by closing 50 points lower than its closing peak. On this same day the A-D ratio made the right peak of a double top. On the rebound from the May 7 low, the A-D line has performed, from what appears on the charts from Stockcharts.com posted on that site May 13,  about equally strongly as the Dow, if not actually a little more powerfully. It is really the A-D ratio which has been leading the price indexes up during the entire rally from the March 10, 2009 lows. I really can't see any basis for saying that the A-D ratio has been lagging the Dow for even the last few weeks, let alone the last few months.

     Having said that, I certainly agree that the number of distribution days is a matter for deep concern, as is the related problem of high volume on down days and lower volume on up days that has been in evidence pretty much during the entire rally from the March 10, 2009 lows. That is why I have dubbed this the "Paul Dysart Market", a reference to Dysart's Negative Volume Index which nobody believes in anymore. Dysart believed that the "big and smart money" preferred to accumulate stocks on quiet days of declining volume so as not to attract attention and make it more expensive to accumulate its positions. This resembles the way large gold accumulators are operating in "the stealth gold bull market", as Richard Russell has described it. However, the stock market rally had come to attract much more attention and belief than the gold bull market in the weeks preceeding the recent mini-crash.  I admit that this Negative Volume concept does contradict the supply/demand logic of the on-balance volume theory and its indicators in their various incarnations. This paradox raises the question of how stocks can advance when more shares are sold on declining price trades than on advancing price trades. But somehow, it does seem to manage to work for particular time periods.

     The A-D derived McClellan Oscillator made a low on May 9 of 2009, the lowest it has fallen as far back as the Decision Point Chart shows, which is May of 2009. The Summation Index, which is the cumulative total of the the daily McClellan Oscillator Readings, is still 450 points above its Mid-February 2010 lows but steepened its downward direction May 13 with a wider downside "gap" between plotted points. For the Summation Index to fall to a deeply low area, the McClellan Oscillator itself must persistently remain in negative territory for many days. And for the McClellan Oscillator to do that, there must be frequently recurring strongly negative days of declines over advances without much of an intervening rally in the A-D line. If the McClellan Summation Index were destined to fall to the 0 area or below, that would imply to me a further significant loss in the price Indexes, given what I have seen, in the context of this particular correction, of most indexes' propensity to decline sharply in proportion to a given extent of A-D decline.

Transports, Utilities, & Iran

     From April 8 through April 23 2010  the DJ Transports powered up another 351 points. At the point of strongest acceleration the RSI reached a peak of 83.14, a remarkably high reading for a major index. This astounding display of leadership and strength is puzzling to me on a fundamental basis because it is difficult to  conceive of the improvement in the volume of physical commerce that this juggernaut of an index seems to be foretelling. I am construing its meaning to be that the economic recovery will be stronger and more persistent than had been expected, though I still can't believe it presages some sort of explosion in the quantity of goods being shipped. I emphasized in my previous letter that the leader ship of the Transports was the key to the durability of this primary bull market. It is hard to believe that the index won't take a rest very soon, but it is not yet acting exhausted. It seemed to be working off the extreme overbought level of its RSI through sideways action of its relative strength versus the S and P 500 during the week of April 19-23. 
     If the Transports do move into a prolonged correction/ consolidation, I will be scrutinizing the action of the dormant DJ Utilities Average to see if it comes to back life and starts moving upwards towards and beyond its Dec. 14, 2009 high of 406.72  The Utilities are considered a bellweather index for a number of reasons. This fact would make an assault on their old highs if it should occur, a very meaningful event. The exception to the bellweather attribute of the Utilities is that they can be a haven for safety and yield in bear markets and recessions, such as they were in 2001-2004. But they did help lead the first major upsurge of this bull market, along with the Transports, to its mid December 2009 highs. Therefore I would looked upon their renewed strength as a manifestation of their bellweather nature rather than of merely a flight to safety in a environment of crumbling financial assets.

     On the question of market sponsership, I still don't believe that this market is being primarily driven by the public. Such members of the non-professional public as are participating are mostly doing so from the long side, but they are not the driving force behind this bull. This market thus far is more of a quiet, Paul Dysart type market with big money sponsership accumulating slowly and inconspicuously. We undoubtedly are into the Dow Theory 2nd psychological phase where the market rises in response to visible improvement in business (in today's case, more of an improvement in profits than in business) and the public participates in moderate but increasing  numbers. As Dow Theorist Robert Rhea wrote, the second phase is usually the most deceptive, stretched out, and difficult to interpret of the 3 primary market phases. Russell's Big Money Breadth Index tells the tale of what the large interests are doing, and its story is that they are accumulating, although the week of April 19-23 did reveal a deceleration in the index's rate of increase. 
    Both the McClellan Oscillator and the McClellan 5% Index declined enough to relieve their overbought condition but not become very oversold. The 5% indicator, in particular, really only declined to a less overbought status. If these two can again move towards the strongly overbought region, it will mean that the breadth of the market is going to surge up noticeably before any appreciable decline from the present price levels. Strong markets can remain neutral to overbought for a long time, but we do like to see an oversold reading once in a while to squeeze out some of the excesses and reduce risk.
     The end result for the week of April 19-23 2010 is that the DJ Industrials and Transports, the cumulative A-D line, the S and P 500 and most other indexes and Averages closed at post March 9, 2009 recovery highs. The DJ Utilities did not
even make a serious attempt at new highs, but remain in a trading range currently bounded by 375 on the bottom and just below 390 at the top. Their sensitivity to interest rates may be the major factor in their hesitation. Since many investors buy them for yield, they have some of the trading characteristics of bonds. And bonds at this time are under suspicion of being in the early stages of a bear market. But the Utilities also have the properties of an industrial index as well since they produce products such as energy and water supply. In particular, demand for energy increases in proportion to increased production and transport of goods.
Thus it is also very sensitive to economic expansion. Which of these two attributes is now dominant in determining its price action is hard to say, but it would be a definite harbinger of a continuing bull market if the Utility Index were to reassert its strength and rally to new recovery highs.
      The following is my reaction to speculation about Israel possibly attacking Iran's nuclear processing plants without cooperation or participation by the US:
      Of course Israel has contingency plans to attack Iran's nuclear facilities, but Obama will not give Israel permission to fly over Iraq, regardless of pressure from McCain. Furthermore, McCain's base among conservatives is rapidly eroding because he is a foreign military adventurist but weak on internal American security (open borders advocate). George W. Bush put us in too a weak financial position and too overextended a military position to carry out major action against Iran. It's true that we now have huge bases in Iraq but the Iraqi Shiites will oppose our use of them against Iran and, where the US is involved, the Iraqi Sunnis don't believe that the enemy of their enemy is their friend . So we would probably be throwing Iraq into violent turmoil if we tried to use our bases in Iraq to attack Iran. The Stratfor article of 2009 clearly outlines why the task is beyond Israel's ability to successfully accomplish on its own, even if it could overfly Iraq.  In actuality, because of the dispersal and hardening of the nuclear sites, it would not be an easy task even for US air power.

Market Correction

    As of the April 1,  2010 the market has been in a correction/consolidation mode for about 3 weeks and in a slow rise mode for a few months. According to my application of the 50% principle of  the late renowned Dow Theorist E. George Schaeffer, the Dow Jones Industrials, Transports, as well as the S and P 500, all  must  stay above their respective 50% levels on any decline to create a favorable probability that they will challenge or exceed their previous all-time high. The half way point of the decline from the high of Oct. 9, 2007 to the low of March 9, 2009 is the measure that is my reference. For the DJ Industrials the 50% level would be 10,355.50, for the DJ Transports 3820.74,  S and P 500 the 50% level would be1120.84. All the above indices haves done this, but  I am using daily closing prices of the  high and low points in these Averages to calculate the 50% levels The S and P 500 was not used by Schaeffer but I am extending the principle he used for the Dow Jones Averages to the Standard and Poors 500 Index.
     Indeed, as Richard Russell of DowTheoryLetters.com has repeatedly observed the Transports have climbed to new recovery highs while the Industrials have taken their time confirming,  so under the Dow Theory we had a belated confirmation. Personally, I feel that because of the weakness in the economy, the Transports are the Index which would tell us the most about whether this recovery can continue to expand. Now that the Industrials have followed the direction of the Transports, we might expect to see Transports take a rest and cool off from their torrid rally. If they can resume their strong leadership after their period of consolidation, that would be a strong bullish omen for the overall market. That is because the activity of the Transportation companies is in direct proportion to the volume of business activity, goods which are being shipped across the nation.
    In today's context, I would view the advent of weakness in the DJ Jones Transports as the most worriesome of  harbingers. By weakness, I mean not only a severe decline in the DJT, but also a failure by them to rally strongly from whatever level they eventually decline to from here. The overall market cannot sustain a strong advance from whatever point it eventually declines to without strong leadership from the Transports, again, the reason being that the strength and duration of this cyclical business recovery is very tenuous and susceptible to collapse. The Industrials are a somewhat less direct reflection of the quantitative level of commerce in the US, because most of them are multinationals that make sales in areas of the world where business and incomes are more buoyant and because they have become so lean and efficient that they can make profits even in a weak economic environment. However, we definitely do need to see them at least confirm the strength of the Transports for a continuation of the broad market rally to sustain itself. If the Industrials should degenerate from merely lagging the Transports to outright weakness it would be an indication of impending problems in the world economy as a whole.
      Even though many technical market letter writers are bullish, and various governmental and private agencies are trying to put the most positive possible spin on statistics that they can (like the National Association of Realtors on changes in home prices or volume of home sales), it still seems to me that this stock market is climbing a wall of every imaginable kind of worry. Poor household balance sheet problems for so many Americans, caused by indebtedness and low incomes are rendering most people unable to invest in financial assets, even if they weren't highly skeptical of the idea that there could be a bull market in stocks taking place. The term "The Great Recession" is a subconscious mockery of the application of the label "recession" to present business and employment conditions. By the standards of business cycle categorization  in use before the Great Depression of the 1930's, this is undoubtedly a depression.
     It really does defy conventional wisdom and common sense that corporations could make profits in a climate of such weak consumer demand. And if companies can't make money, why should stock prices rise? The Boeckh Investment Letter stresses that nonfinancial corporations have excellent balance sheets. In the 4th quarter of 2009, corporate profits were still 4 times their levels at the profitability nadir of  2002. This is a fair basis of comparison because the last quarter of 2009 will probably prove to be the period of minimum corporate profitability for this downturn.  If business and employment conditions worsen significantly from this point, then a new basis of comparison would have to be determined. As many have stated, the obverse side of unemployment is that  corporations have become able to increase earnings by becoming more productive with fewer people.
      I have echoed the prevailing wisdom that this upswing in the business cycle can"t be sustained without improved income for consumers. However, I think that consumer spending must in the future shrink to a smaller proportion of our GDP. I think Americans have the right idea in increasing their savings, both for their own personal good and the long-term benefit of the American economy as well. This country's economy can not continue to be based on consumption that is unsupported by a strong productive base, with the necessary investment for that coming from increased savings by those presently fortunate enough to have income.
      The PE ratio for the S and P 500 is 22.16  (Robert Shiller numbers) as of April 14, 2010, well into overvalued territory, and is 12.9% above its 200-day simple moving average. If earnings are destined to keep rising, the PE number would come down and allow room for prices to rise some more before they became overvalued again. This occurred in the 2002-2007 bull market, but economic fundamentals seem even more challenging now than they were then.  Richard Russell feels that there is widespread bullish sentiment among non-professional investors. William Schmidt of Tigersoft.com says that his indicators have thus far shown positive buying by professionals as well as by the public and have done so since the inception of this rally in March of 2010. I must admit that Russell has a contrary view to my own and Schmidt's, in particular,  is perplexing because public buying and professional buying usually don't go together, especially in the early stages of a bull market. I don't really follow any specific sentiment indicators but my sense is that the public has been and still is afraid of this market because of the huge employment and income problems of the ordinary people as well as the trauma from the recent bear market. Although there has apparently been some improving GDP data, it has not translated into a very meaningful increase in jobs. As mentioned above this bull market has truly been climbing a wall of macroeconomic and financial worry
     The McClellan Oscillator 5% (intermediate trend)  Index has not not fallen below -40 since March 9, 2009 and the McClellan Summation Index has not fallen below  +150  since that time. These charts are  created by DecisionPoint.com but can most easily be found daily on StockCharts.com in the Market Breadth section near the bottom of the Market Summary page. Of course, you must use all lower case letters when typing in the names of the sites on your browser address line.What those numbers tell us is that the stock market has not undergone a significant intermediate term correction for about a year. Since the Jan. 19, 2010 highs we surely have been in an intermediate scale retracement, but it has so far not sold off intensely enough to be considered by me to be severe. The maximum price decline (on a closing basis) during this pullback for the S and P 500 so far is 8.13%. The cumulative advance-decline line has been making new post Mar. 9, 2009 recovery highs since Feb.24 on up days during this moderate retracement. It seems to me that it is an impressive show of strength for for the cumulative A-D line to be making new recovery highs a month and a half into a secondary counter-trend decline. Of course, if the decline accelerates and the S and P 500 falls through the 50% level to its Feb. 23 2010 low at 1094.60, which should provide support, that would still only amount to an 8.35% correction. Although then the Average would have to reprove that it intended to rise and remain above the 50% level. Although the DJ Utilities don't formally play a part in the Dow Theory, they have lagged very significantly  in the rally from the Feb.16 minor trend lows. 
     I have written this post over a period of about 3 weeks, but since I wrote the above paragraphs the DJ Transports are once again leading the market up with strong rallies on April 8th and April 9th pushing them decisively above their March 18 high of 4422.50. On April 14th they exploded upward 108.37 points, or 2.39%.. The A-D ratio and Russell 2K, which had already been stronger than the Industrials or S and P, have zoomed  above their March 23 highs convincingly. The S and P 500 has discernibly exceeded its March 23 high of 1174.17 and now stands at 1210.65 on April 14. Schmidt's Tigersoft professional buying index is pointing upwards and Russell's PTI is not only at new highs, but at a perhaps record 73 points above its 89-day moving average, which Russell refers to as "the primary trend line". The sideways to slightly higher price action which went on in most the the major averages for about the last 3 weeks of March turned out to be a  high level consolidation rather than a topping pattern.
    This market is now even more overbought by many standards than it has been , including the distance of major averages above their 200-day moving averages. The large distance of Russell's PTI above its 89 day moving average is a highly overbought condition. Referring to a Stockcharts.com featured indicator, the RSI  for the Transports is 80.03, for the S and P 500 78.29, for the Industrials 75.41, the Russell 2K 79.02,
S and P Midcaps 76.07. A number above 70 is in the overbought range and over 80 is rare for a major index. The DJ Utilities are the major exception with an RSI rating of only 54.94. These are all April 14 figures. Although strong bull market can stay overbought for a long time and merely correct to the neutral range, as this one has done, one would think that a period of correction would appear in the near future to relieve the overbought condition. If this again took the form of a "flat-top" pattern, as William Schmidt likes to call it, otherwise known as a high-level or sideways consolidation, with the McClellan Oscillators only declin- ing to the neutral area, that would be a sign of extraordinary strength. Of course, these kind of "line" formations near the highs of an average must be carefully studied for signs of at least an intermediate level top. I define an intermediate correction which follows an intermediate top as a decline of up to 15% in the S and P 500 lasting a few weeks to 3 months. Of course, a long bottoming period can stretch out the time length considerably and thus provide a solid foundation for the next advance.

Exchange Theory & Inflation

      On the subject of inflation, let's not forget Irving Fisher's (1911) exchange equation PT = MV. This implies that if the velocity of money (V) decreases faster than the supply of money (M) increases, and the real value of transactions (T) remains the same, prices (P) must fall. I chose this possibility as the first scenario to look at because that is actually what has been happening for the last couple of year and is the reason we have experienced deflationary pressure in the economy. This article will further explore the connection between debt paydown and debt liquidation and its relation to price deflation.
      The quantity T, originally denoting Transactions, actually refers to real GDP and has been replaced in modern textbooks by Q. The quantity T, as originally stated, was hard to distinguish from V. For this reason most all contemporary economists use the equation in the form  PQ = MV, which makes it more readily understandable. Velocity refers to how many times the entire money stock is turned over within the total of all transactions. The only way real GDP (Q) can rise when MV increases is that P either falls, remains the same, or increases more slowly than MV. When  MV is falling,  real GDP (Q) can rise only if P falls more than MV. I discussed the above example to familiarize readers with how the exchange equation works. In the following exposition we will assume that Q (real GDP) remains constant for simplicity in illustrating under what conditions and in what  directions price changes occur in the context of the exchange equation PQ = MV.
     Not all types of exchanges of money contribute to V. For instance, money that is used to pay down debt does not add to velocity, even though, as today, it originates from an increase in money supply. Likewise, I believe that money that is used to raise bank reserves to a higher level probably does not increase velocity unless these banks actually do lend more of this newly found money to people or entities who (that) will spend it. Only if velocity remains constant, increases, or at least decreases to less than needed to fall to the reciprocal of (1 + fractional increase) of the money supply, will monetary inflation (increase in the money supply)  result in price inflation. In the last case immediately above an example would be that if M increased to 4/3 of its previous level (if it increased by 1/3), V would have to decline to 3/4 (decline by 1/4) of its value to keep MV at a constant value.  If V declined  by less than 1/4, MV would increase and, on the PQ side of the equation, prices would increase since we are keeping Q constant for easy evaluation. To be sure,  it takes real net purchases, of either a capital or a consumer nature, to increase the velocity of the money.  
     The quote "inflation is always and everywhere a monetary phenomenon"  is the most famous aphorism, referring to increases in money supply, from the late great monetarist, Milton Friedman. That renowned economist might have added  "if it is also accompanied by a constant or increasing velocity of money (or a decrease in V much less than the increase in M)". The large increase in the money supply provided by the Fed has mostly been used either to pay down debt or to raise bank reserves to higher levels, this last being all the more necessary because so many banks were virtually insolvent, if not literally so. The need of banks to increase reserves has resulted largely from their huge loss of capital caused by massive defaults on the debt instruments they held.
     So, at its essence, most of the money created and provided by the Fed has directly or indirectly gone to pay off debt, and thus will not generate an increase in the velocity of money. Thus the widely-predicted surge in inflation does not have to come to pass. This puts in question some of the more extravagant projections for the ultimate price of gold. Perhaps this condition could create a more benevolent environment for stocks over the next several years by keeping the cost of doing business low and allowing consumers to build up real savings that will not be destroyed by inflation. This in turn would  gradually allow consumers to prudently start making more purchases, thus stimulating GDP in the old-fashioned way, i.e. "We earned it and saved it before we spent it".
   Of course, in this kind of deflationary environment, it will continue to be very hard to earn money in the first place. What all this portends is a return to economic fundamentals and the validation of what could be called "the Austrian school of economics". That is, in the end, the dependence on credit expansion and its accompanying "skyscraper of debt" does not serve to construct a solid prosperity that can survive strong financial tremors, but rather a flimsy edifice that collapses when the monetary earth shakes, destroying the lives of many of its inhabitants and leaving its survivors insecure and helpless.

Sentiment & Mapping the Market

      The essential question of whether we are in a bear market secondary upwards correction or whether a new bull market began on March 10, 2009 is being vigorously debated by investment advisers, newsletter writers, and money managers. Obviously the valuations were not anywhere near classical low points at the March 2009 market lows from which the present market rose. However, I would certainly describe the sentiment around that time as "fearful and despairing" on the part of stockholders and even the non-investing segment of the population. Notwithstanding the recent improvement in economic data,  I would describe public sentiment right now (Jan 15, 2010) as very pessimistic about the economy with the public still avoiding new stock market purchases. Even many market analysts, money managers and economists who believe the stock market will continue to rise believe we are in a "secular bear market" in which the current price rise is only an "upward counter reaction". I personally don't believe we are in the early stages of a new "secular" bull market, but I think we could very well be in a "mini-bull" like the May 1970 to Jan 1973 market advance.
     This discussion will explore the subject of what is the difference between a "primary" and a "secular" bull market and also what is the difference between a bear market secondary rally and a mini-bull market. I will also touch on the distinction between secondary downward corrections and mini bear markets and the differences of both "minis" from a secular bear or bull market respectively. The Dow Theory will be the theoretical background I use to frame this equity market discussion, although it will not by any means be a rigorous Dow Theory interpretation of circumstances or events.
     A secular bull market is one that starts from low valuations and the valuations of which steadily rise toward high levels like Hamilton and Dow's incoming "tide of the ocean towards the shore line" over a lengthy period of time. Conversely, a secular bear market is one which begins from high valuations and the valuations of which steadily decline to an undervalued level, much as a "high tide recedes back out to the ocean" over an extended time period. In traditional Dow Theory terminology these tidal movements were called primary bull or bear movements, but the term secular bull or bear has gradually supplanted the term primary in this definition while primary has come to mean a strong and sustained price movement of lesser magnitude and duration than a secular one. But primaries are still characterized by Dow Theory mechanical bull and bear market signals in which both the DJ Industrials and DJ Transports advance to new highs for the move in the case of a bull signal or, in the case of a bear signal, both the DJI and the DJT decline to new lows for the move. If these primary price movements begin, in the bull market case, from classically low valuations, the primary bull is very possibly the start of a secular bull. If a primary bear begins from classically high valuations, it could well be the genesis of a secular bear.
     The market rallies of the of late 1960's and 1970's era lasted too long and went too far to be called merely secondary upward corrections, but did not last long enough or go far enough to be categorized retrospectively as "secular" bull markets (using today's terminology) so the term mini-bull was later coined to describe them. Under the Dow Theory usage of the time, they were considered primary bull markets, which would today still be the appropriate usage. The Dow Theory will invariably generate a mechanical primary bull market signal in the early phase of a mini-bull market. The 1974-1976 primary bull market began from extremely undervalued levels, so at the time it appeared to be the beginning of what would today be called a secular bull market. But such did not turn out to be the case because it was embedded in a different dynamic. It must be considered a classic mini-bull. That different dynamic was that the whole period from 1966-1982 is now referred to as a secular bear market because valuations over the period fell steadily from the beginning to the end of the period. Stock market prices also ended up lower but not proportionately as much lower as valuations because earnings rose during the latter part of the "cycle". In all of the above discussions it is important to remember that "valuation change" is not the same as "price change". Valuation change is one of the most powerful factors that drive price fluctuations.  When valuation is measured by price/earnings ratios,  price = valuation x earnings.
     The importance of all this labeling and categorizing is that it can inform us about the nature of the overall framework that today's price action is a part of. This, in turn, can provide us with clues about the potential duration and extent of the price movement that is presently in force. In a rally after a severe price decline we don't want to exit too early and miss a lot of the profitability nor do we want to linger too long and become trapped in the sudden resumption of the vicious downside action of a mini bear or secular bear. At a resting point in a decline after a strong price advance, we don't want to buy too soon and then discover that what we thought was a secondary downward correction is really a stage of a mini-bear, or even worse, the beginning or continuation of a secular bear. In the present situation, if we are in a mini-bull within a secular bear market, we might expect the overall advance, with its own corrections, to last a total of a couple of years or more beginning from the March 2009 lows. If the rally from the March 10 lows were merely an upwards secondary correction within a major secular bear downleg, we can expect severe bear market action to resume any time in the next few months.
     To give some examples, the 1987 crash decline possessed the severity and depth of a mini-bear, but in time span was more similar to a severe secondary reaction (i.e. correction). The 1990 decline in both duration and extent better fits the description of a mini-bear. The mini-bear occurs within a secular bull market but lasts longer and falls further than a typical bull market reaction (correction). These attributes can make the mini-bear difficult to distinguish from the beginnings of a secular bear market, especially since they will invariably render mechanical primary bear sell signals under the Dow Theory. The 1994 decline gave a Dow Theory primary bear signal, even though it was not even a mini-bear but was more clearly a case of a typical sharp downward secondary reaction within a bull market. The 1970-1973 rally was a classic mini-bull because it occurred within a secular bear market as was the aforementioned late1974 to 1976 rally. This mini-bull had a peculiar twist in that the DJ Averages declined during 1977 while the A-D index advanced, carrying up the small and mid-cap stocks. A general rally ensued in 1978 punctuated by a severe correction in October of that year. It could be reasonably asserted that the mini-bull began in Dec. 1974 and lasted through Sept. 1978. I think that that the 1932 to 1937 and 1942 to 1946 primary bull markets probably should be considered mini-bulls because they occurred within a secular bear market unfolding from 1929 to1949.
      On the issue of sentiment, I think that it is essential to distinguish between the beliefs of market analysts and money managers, many of whom issue frequent comments about their opinions in various media and the non-professional public. Of course newsletter writers and prominent economists are also members of the highly visible professional category. With the advanced tools of today's market technicians and the staffs of money management institutions researching the fundamentals of companies, industry groups, and the economy as a whole, it is only natural that contemporary professionals are going to identify new trends and other characteristics of the economy and the markets more rapidly than the "layman investor or observer". These factors make the task of assessing economic and market sentiment much more complex. Thus, knowing what is really a valid "contrary opinion" is more difficult to evaluate. And determining what the correct "contrary opinion" actually means at any given time is by far the main motive for the emphasis on realistically determining sentiment. Over time, the majority of investors apparently can not be right so there is a real premium on trying to take positions that are contrary to the "herd" or "crowd". The majority is usually the most wrong at turning points (tops or bottoms). However in the middle stages of the price movement of any class of asset, the majority in all categories of investors must surely be right. Otherwise it would be virtually impossible for  major price trends to exist because there would not be enough demand to drive up prices.
     To the early Dow Theorists Charles Dow, William Hamilton, and Robert Rhea, market sentiment to a large extent meant the thoughts and feelings of the general public, not the market professional, if for no other reason than simply because the professionals just were not so numerous and omnipresent as they are in the "modern" era. It is not reasonable to expect the majority of market letter writers to understand as little about what the market is doing as individuals from the ordinary public and therefore to take a contrary opinion to them is not equivalent to taking a contrary opinion to members of the non-investment professional citizenry.  Many of these adviser/analysts are quite insightful in their use of sophisticated technical tools to analyze the price variations of numerous indices. Most of them do not closely study the Dow Theory per se but do understand some of the Dow Theory principles, such as the valuation cycles and the importance of major indexes confirming each other (though not necessarily the DJ Industrials and DJ Transports as in the Dow Theory).
     But even today market analysts like John Swenlin of Decision Point, who is bullish on his own definition of the long term trend of the S&P 500, believes we are in a "secular" bear market that began in March 2000. Under this interpretation the 2002-2007 bull market, although certainly a "primary bull market", could not be considered a "secular bull market" because it did not begin from classical very low valuations. Therefore it fits the description of a long-duration "mini-bull" and the 2007-2009 decline a major downleg of the "secular bear". This type of action is, of course, reminiscent of the 1966-82 and 1929-1949 secular bear markets with their intervening "mini-bulls". Using the Elliot Wave Theory to analyze a putative secular bear market beginning in March 2000, we might expect a 3rd major downwave from the top of a 2nd major upwave (the current one) of a major overall secular bear market consisting of 5 subwaves (3 down and 2 up). The question we are now puzzling over is where this 4th wave (2nd upwave) will end. Is the current sideways to mildly upward price action defining a topping area of the 4th wave (2nd upwave) or is it just an inflection point on the way to the real peak? When the 5th wave (3rd downwave) gets going, it will likely be brutal, but from what levels will it begin? If this mini-bull were similar to the May 1970 to Jan 1973 mini-bull, we might expect this one to last into the fall of 2011. However, as I noted above, some of the mini-bulls have lasted 4 to 5 years.
    The preceding paragraphs do indeed imply that I subscribe to the theory that we are in mini-bull market within a secular bear cycle. I also offer one more alternative to the list of possibilities for the nearer term resolution of stock price trends. That is that we are making an intermediate term top within the min-bull after which the 4th wave (2nd upwave) will resume. It really seems to me that an intermediate correction in this mini-bull market is overdue.
    Crestmont Research has done extensive research on the concept of "secular bull and bear markets" and may be the creator of the concept. Crestmont Research  also uses the terms "cyclical bull" and "cyclical bear" markets rather than "mini-bull" and "mini-bear" markets. I would also venture to say that the distinction between a mini-bear and a downward correction within a secular bull market is a less important one than the distinction between a mini-bull and an upward correction within a secular bear. My reason for saying this is that downward price movements of all types move faster than upward ones,  and thus a mini-bear will arrive at its destination too rapidly for an awareness of the distinction to provide much practical benefit.

                                          The Unraveller