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September 08, 2003

The Market That Won't Die!
by David Chapman

The bull market that had its beginnings back in October 2002 keeps trudging higher. Indeed to the consternation of many bears it is becoming a "market that wont die". Of course the fact that it makes little sense that it should keep going up has nothing to do with. The trend is up, the money flows have been positive, earnings are improving, the economy is improving, unemployment looks shaky but the market seems to ignore it, housing prices have been at their highest levels ever, money is coming back into the mutual fund market, and, as they seem to perennially note, a lot of money is still sitting on the sidelines. If the market is discounting future better times then the almost year long rally (the correction into March 2003 aside) must be telling us that the good times of the 1990's are back again.

Nothing, of course could be further from the truth. The rally, particularly as the summer has worn on has been on some of the most pitiful volume we have ever seen. If there was a way of describing this rally it is the "sleep walk" rally due to the daily manner in which it tries to put market participants to sleep. Of course the low volume has not been everywhere. A prime exception has been the gold stocks where volumes have been high as the market moves higher.

And fueling the market further is the prognostications of some that say that not only is this a cyclical recovery but that it will continue well on into 2004 because 2004 being an election year the market always go up. They might be right. After all it is not difficult to note that election years since 1970 have generally been to the upside. An exception was 1982 the year the major bull market at the end of the century began, but once it bottomed in August it was straight up the rest of the year.

And 1998 wasn't too good either although the market rallied into the summer but then it caught Asian contagion and the collapse of Long Term Capital Management (LTCM) and a nasty bull market correction got underway. Of course once the Fed flooded the market with liquidity to prevent a global financial collapse due to LTCM it was up into 2000 and the bull market top.

But as we try to remind everyone we are in a secular bear market not a secular bull market. The secular bull market that began in the doldrums of the summer of 1982 lasted 18 years. Through that period we saw significant corrections in 1987, 1990, 1994 and 1998 or roughly every four years. There is no question now that the last 4-year cycle low was the one we experienced in October 2002. So the argument goes that we should now go up and we won't experience another significant bear correction until 2006. The presumption by the bulls is that the market has entered a new secular bull market and in a secular bull the cycles are right skewed so the market should continue strong into at least 2005. And even though we firmly believe we are in a secular bear a bull market correction could last into 2005, as even in earlier secular bears it was not unusual to see bull corrections that lasted the better part of three years.

The last secular bear we experienced was the one from 1966 to 1982. During that period we experienced significant lows in 1966, 1970, 1974, 1978 and of course the final low in 1982. Peaks during that period were seen in 1968, 1973, 1976 and 1981. One of the highlights of that era was that the Dow Jones Industrials was never able to climb significantly over 1000. This was the inflationary period of the Kondratieff cycle. In real terms the market of course fell even further with the 1982 low expressed in constant dollars even lower than the 1974 actual low. But overall it was a rolling 16-year bear market characterized by many rallies and equal setbacks. The 1966-1982 bear market ended in 1983 when the Dow Jones Industrials firmly took out the previous highs.

The most famous bear market was the one seen from 1929-1949. The actual low in the market of course was seen in 1932. Cycle lows were seen in 1932, 1938, 1942, 1946 and 1949. Market peaks were seen in 1930, 1937, 1939, 1945 and 1948. The only one that clearly threw out the 4-year cycle was the 1937 peak and subsequent 1938 low. A half cycle high and low was seen in 1934 while 1936 instead of seeing a low experienced a sharp rally. The highlight of this era was of course the devastating 1929-1932 bear market that wiped off almost 90% of the value of the Dow Jones Industrials. The next 17 years was spent trying to create the base and conditions that set off the 1949-1966-bull market. A huge symmetrical triangle formed between 1937 and 1949 that was broken in 1950. It wasn't until 1954 that the highs of 1929 were taken out. This was the deflationary period of the Kondratieff cycle.

We have noted in the past that this is the deflationary period of the Kondratieff cycle. So will the market play itself as it did from 1929-1949? Not likely as each cycle takes on its own characteristics. One thing we are sure about is that this is merely a correction within the context of the secular bear and yes it could continue to be in play until 2005. But as our weekly chart of the Dow Jones Industrials shows us we have been in a steady downward trend since the peak that was seen in 2000.

All the recent rally has accomplished is to bring us back towards the down trend line that has been forming during this period. And it may be that while the next move is down the lower end of this downward trend could once again hold any move. We do note the support zones that are forming around 9000, 8000 and 7000 any one of which could contain the next downward move. The market would then move upward again within the context of this downward move to once again test the upper regions. This could easily be our scenario between now and 2005 when the forces of the next 4-year cycle low once again takes over.

But this type of downward drift also eventually plays itself with a huge drop through the bottom of the forming descending triangle. So it is good to keep this in mind as we go forward. The growing massive overhang of debt that in the USA grows at a rate of $1.2 billion a day is not sustainable. The US is trying to monetize this debt through competitive devaluation of its currency.

Witness the recent efforts in China to try and convince the Chinese to set the Yuan free to trade on world markets or at least revalue their currency upward against the current fixed rate against the US$. Given the strength of the Chinese economy (having now assumed much of the manufacturing sector that used to reside in America) an instant upward valuation would get underway (Currently US$1 = 8.28 Yuan).

But there is going to be some reluctance on the part of the Chinese to revalue their currency upward as they will not want to spoil a good thing in their export economy. As well other Asian countries are trying to prevent their currencies from rising. These export led economies like Japan would be hurt if their currencies rose against the US$. Clearly a struggle is being played out in the currency world and when countries do this there is only one currency that will hold its value and that of course is gold.

The "market that won't die" is ignoring a lot of other things besides the currency struggles and rising debt. Rising and unsustainable levels of price earnings, rising unemployment where more and more workers are dropping out or former career driven salary employees are being forced to take hourly jobs at a fraction of their former incomes, rising interest rates that will feed back into the mortgage market putting a damper on the hot housing market, a deteriorating situation in Iraq and an end to the "road map" for peace in the Israeli/Palestinian conflict, threats of further terrorist attacks, threats still being made against Iran, Syria or Korea. Any or any combination of these could suddenly derail this market. To ignore them while maintaining a bullish stance on the market could turn the gains of the past several months quickly into a mere remembrance. With most cycles turned down into the fall even a rising market needs a pause to refresh and reflect. Go away and don't come back until December at the earliest.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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