Analysis - Sunday, March 18, 2001 7 pm (Caution!)
Just seven trading days ago, on March 8, the Dow closed at
10858, once again near the strong resistance near 11000, which
has been an impenetrable barrier for the Dow this year. We
have since fallen 1035 points on a closing basis. This
decline has seen the Dow fall to within just 1.55% of the
critical support at 9571 intraday. Friday's intraday low was
9720. That 9571 intraday number, as we have told you, is of
critical importance to our Gann Yearly Chart. We have received
numerous questions about this chart recently, and because of
its importance here we will attempt to answer a few of those
questions for you tonight.
We follow 19 different swing charts, each adapted from the
work of W.D. Gann. These charts are used to determine the
market's main trend. They vary in time from the very shortest
term Hourly Charts, to the longest, the Yearly Chart. The more
time covered by any of these charts, the more important are
its signals, so the Yearly Chart is by far the most important.
This chart will turn up from any Bear Market low when the Dow
rises above the intraday high of the prior year. Once it
turns up the chart will continue to point higher until the
Dow falls below the intraday low of a prior year. Now if you
ask ten different investors what is the difference between a
true Bear Market and a correction you will get ten different
answers. Our research has proven that the one thing that has
been constant during every true Bear Market in the Dow's
history is that the Dow ultimately fell below the intraday
low of the prior year, turning the Yearly Chart down. There have
been no exceptions! After the August 1982 Bear Market bottom
the Yearly Chart turned up on 10/13/82, when the Dow exceeded
the 1981 high of 1031 intraday. Prior to the 1982 low the Dow
had been in a wide trading range for 16 years. Every Bull
Market during those 16 years peaked when the Dow rose near
or slightly above 1000. The upturn in the Yearly Chart in
1982 marked a "secular" change in the direction of stock
prices. This time when the Dow exceeded 1000 it marked the
beginning of the greatest Bull Market in stock prices in
history, with the Dow ultimately rising over 1,448%, to the
January 14, 2000 Bull-Market high. For the entire 18-year-time
frame since the 1982 lows, not once did the Yearly Chart turn
down, that is, during no decline for that 18 year period did
the Dow fall below the intraday low of the prior year. The
question which always comes up is, "Well, what about the 1987
crash?" The intraday low for the Dow for the year 1986 was
1491, seen on 1/23/86. The intraday low during the 1987 crash
was 1616, seen on 10/20/87, so the Yearly Chart did not turn
down in the 1987 crash. What this means is that despite any
"correction" we have seen from 1982 to January 2000, we have
essentially been in one long Super-Bull Market. Prior to 1982
the longest Bull Market, according to the Yearly Chart, was
from 1921 to 1929, lasting eight years and one month. During that
period there were numerous very sharp, and sometimes
severe corrections. But at no time did the Dow fall below the
intraday low of a prior year until after the 1929 high. The
Bull Market from 1982 to 2000 has lasted more than twice as
long as that from 1921 to 1929. We have stated many times
over the years that when the Dow falls below the intraday low
of a prior year, the Bull Market which began in 1982 will be
officially over. The intraday low for the year 2000 was 9571
intraday, seen on 10/18/00. If we fall below that level this
year, the Yearly Chart will turn down for the first time since
the 1982 bottom. This will mean the Bull Market which began
in 1982 will have officially ended. Now if you examine every
Bull and Bear Market in stocks over the last 200 years,you
will find the magnitude and duration of each Bear Market is
related to the magnitude and duration of the preceeding Bull
Market. A Bear Market which acts to correct the excesses of
an 18-year Bull Market is not going to end within just 14
months, and down just 20% or so from the highs. As long as we
hold above 9571 intraday we can still make a case for a
resumption of the Bull Market later this year. However, we
repeat: if the Dow falls below 9571 intraday it will mark a
secular change in the direction of stock prices. If that
occurs there are means to approximate how long the ensuing
Bear Market will last, but we will not go into that here.
If the Yearly Chart turns down this year we have two targets
for this year's low. The first, and most generous, would be in
the area of 9280 in the Dow. We frankly consider that to be a
minimum. The second, and most probable, would be down near or
below 6960. If that second target is met, keep in mind that it
would take some time for prices to reach that area, and there
would be numerous extremely strong rallies along the way.
Many of those rallies will be strong enough to convince most
investors the Bear Market is over. It would also not surprise
us to see days when the Dow closes up with the largest single
point closing gains in history. In fact, even if the above
scenario proves correct, we would look for the Dow to spend
more time going up the rest of the year than down. The
declines would be fast and furious, while the rallies would
be more drawn out, lasting longer in terms of time.
We are now in a 60% cash position. Given how close the
Dow is to that 9571 intraday level we are going to raise that
up to 70% cash on Monday. The market is looking for major
help from the Fed on Tuesday, and we suspect they will get it.
We could see a strong rally if the Fed news is good, but if
the Dow falls below 9571 intraday before the Fed news, we
believe the rally will fail. The next Cycle high is due near
March 21, plus or minus 1 day. If the Dow rallies strongly
into that time frame, we may then do some further selling, and
give some specific shorting recommendations. We recognize
that for a variety of reasons most investors will not, and
probably should not, go short. That is something best left to
professionals. However there are ways to hedge your portfolio
against a major decline, like longer-term put options or
purchasing one of the Bear Funds, like the Rydex Ursa Fund. In
fact, if the Dow falls below 9654 on a print basis anytime
from here on we would take a 50% long position in the Rydex
Ursa Fund. That is, whatever funds you might be willing to
commit to one of these Bear Funds, invest 50% of that amount
if the Dow falls below 9654 on a print basis. Keep in mind
however, that we would consider that an intermediate-to-longer
term investment. We would not be concerned with whether or
not we begin some sort of short-term rally soon after the Dow
falls below 9654 on a print basis. If the Yearly Chart turns
down it will suggest the longer term trend has changed, and
significantly lower prices are coming later this year, despite
any short-term rally. If the Dow does move dramatically lower
between here and year end, these Bear Funds will rise in value
significantly.
Each investor should actually discuss with his/her own broker
the most appropriate means to hedge his portfolio against a
possible major decline later this year. But we would do that
right now, not later. |
