Dow Theory Says NO

Of late I have heard the argument made that the November 2008 to February 2009 period is like the October 2002 to March 2003 time period. Of course, the basis for drawing this alleged parallel is that the market has bottomed. Well, according to Dow theory, this is not like March 2003.

Ever since the short-term non-confirmation was first born on January 20, 2009, when the Transports closed below their November 20, 2008 closing low, there has been talk of the potential bullishness of that non-confirmation. As explained in my last posting here on February 7th, non-confirmations are mere warnings of a possible trend change and in accordance to traditional Dow theory the previously established trend must be considered to still be in force until it is authoritatively reversed. In the current case, the previously established primary trend change occurred on November 21, 2007 when both the Industrials and the Transports jointly closed below their previous secondary low point. In spite of many misrepresented or misunderstood views on Dow theory, nothing has occurred to invalidate the now 15-month old primary bear market. In fact, the price action on February 19, 2009 carried both the Industrials and the Transports down to new joint closing lows. In doing so, the Industrials closed below their November 20, 2008 secondary low point. As a result, the primary bear market has been reconfirmed once again.

Now I want to turn to the charts. In the first chart below I have included a chart of the 2002/2003 bottom. Note that the averages both made a joint low at the October 2002 secondary low point. From that low the averages rallied into their November/January secondary high points. From these high points the averages moved down into the joint March secondary low points. At that time the Industrials held above their November low as the March secondary lows were formed. As a result, a non-confirmation was born. Then, from that non-confirmation price moved up and in June both averages bettered their previous secondary high points. In doing so, a new primary bullish trend was authoritatively established.

Now let's turn to the current chart that I have included below. As you can see the non-confirmation that was born on January 20th was blown out of the water this past Thursday with the new joint closing low that carried the Industrials below their November secondary low point. Thus, the current Dow theory picture is not even remotely similar to that of the 2002/2003 bottom. Now, this is not to say that short-term bounces aren't possible because they are and I am watching my indicators very closely to tell me when such a bounce takes root. Once this occurs we will hear talk of a double bottom and that the Dow theory gave us a "false" signal. But, once my short-term indicators turn back down triggering another sell signal, that is assuming we get a short-term bounce along in here, then the stage will be set to clobber the unsuspecting "double bottom we have a false Dow theory signal it's all going to be okay" crowd.

Here are a few quotes from the last great depression.

November 1929
Some reassuring utterance by the President of the United States would do much to restore the confidence of the public. William Randolph Hurst

November 1929
Any lack of confidence in the economic future of the basic strength of business in the United States is foolish. President Hoover
June 1930
The worst is over without a doubt. James J. Davis, Secretary of Labor

September 12, 1930
"We have hit bottom and are on the upswing." - James J. Davis, Secretary of Labor.

October 1930
Looking to the future I see in the further acceleration of science continuous jobs for our workers, Science will cure unemployment. Charles M. Schwab

October 1930
I see now reason why 1931 should not be an extremely good year. Alfred P Sloan, Jr. General Motors Corporation

December 1930
Economic depression cannot be cured by legislative action or executive pronouncement. President Hoover

July 21, 1932
"I believe July 8, 1932 was the end of the great bear market." - Dow Theorist, Robert Rhea.

It is important to understand that Wall Street and the politicians are the ones that created the economic mess we are in. The politicians did not see this coming, they do not understand this problem and they are not going to be able to fix it. From my seat, it is actually comical, but sad, to watch these guys in action. I honestly believe they are clueless. For the record, I warned about the extended 4-year cycle advance all throughout 2005, 2006 and 2007. It was then at the 2007 New Orleans Investor Conference that I first revealed the possibility of a 1930 to 1932 style setup occurring following that extended 4-year cycle advance. Don't buy the current hype.

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