Monday, February 23, 2009

Dow Trend Confirmation Signals

With respect to the severity of the current bear market, I agree with anyone who thinks that a much deeper bear market, like the one in 1929 (-89 %) is just one possibility.

However, there is another worse case scenario we should keep in mind. It is the possibility of a long duration, more or less sideways bear market, similar to the 1968 to 1983 time period. A lump sum held in the stock market through that entire 15 year period would have earned 0 percent in capital gains.

In fact, we may already be in one of those sideways market periods. It may have begun back in 2000. More so for the US than in Canada. Many stocks started their bear in 2000. Those stocks have already been in a bear market for the last 9 years.

In the short term, I continue to see a high probability of at least some additional downside below the November lows for all N.A. indexes. Likely world wide.

My expectation is based in part on the fact that the DJIA, the DJTA and the TSX Capped Financials and the TSX 60 (as of today) Indexes have all broken below their November lows. In short, we have an abundance of evidence to demonstrate the Dow Theory Trend Continuation signal has been given loud and clear.

Some people continue to hope for a large bear rally at this time. Unfortunately I see little opportunity for this to happen. In fact, a large bear rally may not even happen during this bear market if it goes much deeper. That pattern is only one possible bear leg down one leg up then a final leg down.

If a bear rally does occur, I see it starting at some lower level, not starting from the Nov. lows, and not now.


Anonymous said...

interesting post. can u write one about where u think this is all going to go? what do u think the bottom will be?

1968 to 1983 may have produced 0% in capital gains but doesn't take into account that u could have had some dividend paying stocks during that period so u would be somewhat in the positive.

Canadian Money said...


I don't know where the market will be next month or next year. I monitor it on a continuous basis with a view to keeping abreast of the current trend.

At this time I see the bear downtrend continuing.

With respect to the 1968- 1983 example, one would have to consider dividends, plus any market broker related costs such as mutual fund fees and the negative effect of inflation. It may or may not be a little positive.

However, for a lump sum at the peak, I expect a modest GIC alternative, paying say 4%, would have outperformed the market.