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[augieboo]

LURQER ON DOW 2900

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Part I: From Panic to Mania

While most would say that Panic follows Mania, if you believe in broad recurring market cycles, or even that history rhymes,

http://www.ling.helsinki.fi/~widenius/clemens.html

then Panic must also precede Mania. Let’s look at the two-century Dow Chart to get the “big picture”.



The last three times the Dow touched the depicted upper channel line, have been times of stock market mania. True the ’66 mania only kissed the upper channel and the evaluations of the Go-Go market never got to the extremes of the ’29 and ’00 mania peaks. In both ’29 and ’66, the Dow fell from the upper channel to just above the lower channel and then bounced. This was the Panic stage of the market. After bouncing in ’32, the market oscillated sideways. When the market bounces off the bottom channel, the dominant market emotion is despair – because that bottom channel is so low. With the sideways oscillation, the roller coaster market turns despair into disgust. From this disgust the new secular bull is born.

In the first “show me” part of this new secular bull market, doubt is rampant. Most believe the market will turn and “retest the lows”. As time passes and the market reaches the mid-point of the channel, fear subsides and greed dominates. This sets the stage for the final mania stage of the secular bull with a blow-off top.

So to recapitulate, the stages from Panic to Mania are Panic/Bounce/Oscillate from Despair to Disgust/Show Me/Greed/Mania. From the diagram, we are currently in the Panic stage. That we are still early in the Panic stage is attested by the constant “bottom” calls and discussion of when we will return to the old highs. The answer to – Have we reached the bottom? – is have we approached the lower channel of Dow 2900? The answer to - When we will return to the old highs? - is between 2016 and 2020. IOW, the answer to both questions is: Long after anyone cares.

So, if the market is in the Panic stage of going from the upper channel line to the lower channel line, the remaining question is: How does it get there? But that’s another post.

lurqer

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Part II: The down elevator’s route.

In a previous post, I outlined the Panic to Mania cycle

(see Part I, above)

and concluded that we were in the panic stage. Again referring to the Two Century Dow Chart



note that prior to ’00, the two previous secular bull tops were in ’29 and ’66. From the ’29 top, the market declined in an almost straight line to the vicinity of the lower channel line. In the ’66 to ’82 secular bear market, the plunge from the ’66 high to the ’74 price low near the lower channel line has a two tiered plateau between ’66 and ’72. While as indicated on the chart, the value of stocks declined between ’76 and ’82 because of sever inflation, the prices oscillated sideways.

If you inflate a balloon and then let it go, it will rocket around from the force of the venting gas. The more you inflate the balloon, the higher the pressure and the more force that is exerted during deflation. I could be wrong, but I believe a similar phenomena exists with markets. The higher the mania peak, the greater the downward “force” pressing the market toward the lower channel. Since in ’00, we had the highest peak (as measured by evaluations) ever, one scenario would be for the market to go straight to the lower channel line.

But I don’t think so. To understand why, you must have a reason for secular bull and bear markets. I subscribe to H. Dents belief that long term secular trends are a function of the spending patterns of large demographic bulges in the population. In his several books, Dent exhibits the remarkably close correlation between the spending patterns of the demographic bulges and the large secular patterns of the market. IMO, Dent both pushes his argument to far in trying explain detail market “wiggles” with demographics, and by leaving out other market influence factors – like human emotion. Nevertheless, his exhibited correlation between the large secular trends and the spending demographic is compelling.

In the ’29 to ’32 Panic decline, the market collapse coincided with a precipitous decline in demographic spending. In ’66, the Market peak occurred prior to the spending decline. This, I believe, is the cause of that two tiered plateau, between ’66 and ’72. Only when the generational spending decline occurred in ’72 did the market plummet to the lower channel. One could hypothesize that a decline in the upper half of the channel is caused by CapEx spending cuts resulting from the overbuilding during the mania. But to get the decline through the lower half of the channel, significant reduction in consumer spending is required. In both the ’29 to ’32 and the ’66 to ’74 declines, the lower channels were approached only after the boomer’s grandparents and parents had passed their peak spending years.

So what does the demographics tell us about the current decline? Again, like ’66, the market mania peaked prior to the demographic spending peak. This would imply that we may have some “fine structure” of a sideways oscillating plateau before the final plunge to the lower channel. OTOH, the mania peak in ’00 considerably exceeded the mania of the ’66 Go-Go peak. Thus, there may be significantly more “force” to push us directly to the lower channel.

While a straight line descent to the lower channel cannot be ruled out, I believe that the demographic spending will “cushion” our fall until ’07. Note that with the subdued mania of the ’66 peak, and hence, less downward pressure, the “cushioning” occurred in the upper half of the channel. I suspect that the greater downward pressure of the ’00 decline will cause the bounce to occur near the center line – around Dow 4900. I would then expect the market to oscillate sideways until ’07 before falling to the lower channel at Dow 2900. This bounce and oscillation off the center line is similar to what occurred at the centerline during the secular ’82 to ’00 bull market in ’87.

Depending upon how many oscillations occur before ’07, you get various market scenarios. I currently favor a Twin Top scenario, but that is another post.

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Part III: The Twin Top Plateau – a SWAG

In two previous posts, I’ve outlined the Panic to Mania cycle

(Part I, above)

and an oscillating plateau that may occur in the current decline.

(Part II, above)

What I would like to describe now is one of a family of scenarios that detail the plateau oscillation in the decline.

If the panic intensifies and the Dow reaches 4900 next year (’03), then, IMO, a bounce that lasts most of the way through ’04 will occur. This bounce will take us up to around 6800 to maybe 7300. During the bounce there will be considerable talk about the “end of the bear” and when we will “reach the old highs”. New investors will be encouraged to put their money in the market because “the bottom is in”. Rising interest rates and a rising market will result in asset reallocation. And Bush will try to get re-elected.

By late ’04 or early ’05, the market will peak and head downward. This time without the momentum from the fall off the peak, the market will bounce again, but from a higher point – around 5100 – in the later part of ’05. Then market will rise again. Many will hail the double bottom. They will discuss at length the fact that the second bottom is higher than the first so this “proves” that in ’06 we are in a secular bull market. Hence, it’s time to invest “for the long haul”.

By late ’06 the market will turn again, and this time, never recover. It will plunge to Dow 2900 near the lower channel. Despair will reign. All the boomer’s LTB&H plans to retire wealthy will be dashed. Particularly sad is the plight of those “sucked in” during the brief ’03 to ’06 hiatus in the decline.

This is merely one scenario for the decline to Dow 2900. The long term chart makes it clear that is where we are headed – unless you believe “This time is different”. The only question is: how do we get there? Or, put another way – Is there “fine structure” on the way down? It is possible to argue that the force of the decline is sufficient to carry us to Dow 2900 in a straight line, or if not a straight line then with only one bounce – the One Top scenario. Alternatively you could speculate that the oscillations will be more brief, leaving time for a Triple Top between ’03 and ’07.

Some things remain fixed. We’re headed for Dow 2900. We’ll get there not later than ’08. In between is guesswork, and my best guess is the Twin Top Plateau.

lurqer







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