Not much has changed of late, but I do see change on the horizon for 2010. From a Dow theory perspective, the bullish trend confirmation that occurred in 2009 remains intact. From a cyclical perspective, the higher degree low that began at the March low remains intact as well. Longer-term, my opinion has not changed in that based on my data, I continue to believe that in spite of the now 11 month rally this is nonetheless a counter-trend advance within the context of a much longer-term secular bear market. Once this rally is over, I think that most people will be very surprised to see the return of the bear as the Phase II decline takes root. History shows us that Phase II declines are the most destructive and this is because the masses think that the bear market has ended and then once the realization begins, so does the panic. Furthermore, I don't think the Fed and the politicians in Washington will be able to stop it and I hope that this time around the people will not allow the continued waste of stimulus packages.

In the chart below we have a basic Dow theory chart. In the upper window are the Industrials and in the lower window are the Transports. Thus far, there are no non-confirmations and no indication that the 2009 bullish trend change is not still intact. But, in spite of that fact, there are other aspects of Dow theory that continues to tell us this is nonetheless a bear market rally.

I have covered Bull and Bear Market relationships and value here before, but it has been a while and it's probably not a bad time to cover it again. The definitions of Bull and Bear markets differ from person to person. My definition is centered on long-term secular bull and bear markets that are based on the works of the great Dow theorists, Charles H. Dow, William Peter Hamilton and Robert Rhea.

When studying the bull and bear markets of the late 1800's and very early 1900's, it became apparent that the bull markets Dow, Hamilton and Rhea wrote about were one in the same as the movements of the 4-year cycle. The upside movements of the 4-year cycle were consistent with the bull market periods of their day in accordance with Dow theory and the bear market periods were the downside movements of the 4-year cycle. In other words, the secular bull market was the up side piece of the 4-year cycle and the bear market was the downside piece of the cycle. Now, let me make it perfectly clear before we go any further, Dow theory has nothing to do with cycles. These are completely separate tools. Anyway, as our country grew, more and more people began investing and as a result the bull and bear market periods became longer. In doing so, the bull and bear markets evolved into a series of multiple 4-year cycle events. It was E. George Schaefer, the great Dow theorist of the 1950's and 60's who first recognized that these bull and bear markets had grown in duration.

The first bull market to consist of multiple 4-year cycles ran from 1921 to 1929 and consisted of two 4-year cycles. The low in November 1929 was a 4-year cycle low. The rally that followed was the upside of a 4-year cycle, which served to separate Phase I from Phase II of that great bear market. This advance topped in only 5 months and once it was over, the DJIA moved down below the previous 4-year cycle low and into the 1932 4-year cycle low, which proved to be the bear market bottom. I would also like to point out that the 1921 to 1929 bull market advanced a total of 568% from the 1921 4-year cycle low at 67 on the DJIA to the 1929 4-year cycle top at a high of 381 on the DJIA.

The next great bull market began with the 4-year cycle low in 1942 and ran to the 4-year cycle top in 1966. This time the secular bull market was comprised of a series of six 4-year cycles and advanced a total of 1,076% from the 1942 4-year cycle low at 93 on the DJIA to the 1966 4-year cycle top at a high of 1,001. Note that this bull market advance was roughly double the preceding great bull market. The bear market that followed was also a series of 4-year cycles. From the 1966 4-year cycle top, the bear market moved down into the 1974 bear market low. This was a series of two 4-year cycles.

Now, let's focus on the bear market declines. Prior to the first great bull market that ran between 1921 and 1929, the bear markets averaged some one-third the duration of the previous bull market. This relationship has also held true with the extended bull market periods as well. For example, the 1921 to 1929 bull market was 8 years in duration and the 1929 to 1932 bear market was 3 years, making the bear market duration 37.5% of the preceding bull market. The 1942 to 1966 bull market was 24 years in duration and the 1966 to 1974 bear market was 8 years, which was 33.3% of the duration of the preceding bull market.

From a cyclical perspective, the last and greatest bull market of all time began with the 1974 4-year cycle low. Some say that it began at the 1982 low and I understand that argument. However, from a cyclical perspective the bull market began in 1974, which was the actual low point of the 1966 to 1974 bear market. 1982 was when the bull market broke out and became apparent. There is also an argument from a Dow theory perspective that the low occurred in 1974 as well. I'll save those details for now, but let me just say that Richard Russell did call the 1974 bear market bottom using Dow theory. So, as measured from the 1974 low into the 2007 high, the last great bull market advanced a total of 2,391%. Note that this bull market advance, on a percentage basis, was roughly double the preceding great bull market.

Anyway, at the 2000 top, the third great bull market that began at the 1974 low had run some 26 years. Given that history shows the bear markets average some one-third the duration of the preceding bull market, if the top occurred in 2000, then one-third of that 26 year period would be 9 years in round numbers, which would obviously suggest a bear market bottom in 2009. However, I do not believe this is what happened. It simply does not fit the profile and I have covered this in greater detail in recent research letters for subscribers. I believe that the secular bull market tried to top in 2000. I also believe that the decline into the 2002 low initially began as the Phase I decline. But, because of the efforts by the FED, I believe they were able to resurrect the bull market and that it was stretched into the 2007 top.

Additionally, from a Dow theory perspective, all secular bear markets have ended with stocks at great values. That value is representative of the dividend yield being roughly equal to the P.E. ratio. Yes, it is a fact that at true secular bear markets the dividend yield and the price earnings ratios will be roughly equal. As an example, in 1932 the yield on the S&P 500 was 10.50% and the P.E. was just under 10. In 1942 the yield was 8.71% and the P.E. was 7.3. At the 1974 bottom the yield was 5.9% and the P.E. was 7.24. In 1982 the yield was 6.2% with a P.E. of 6.9. At the March 2009 low the P.E. was 23.77 with a dividend yield of 3.58. At the October 2002 low the P.E. was 29.95 and the yield was 1.98. As you can see, neither the 2002 low nor the 2007 low represented the great values that have been seen at previous secular bear market bottoms.

Based on Generally Accepted Accounting Principles, which is how the values at the historical lows mentioned above were calculated, we have not seen a secular bear market that is representative of value. George Schaefer. The great Dow theorist of the 1950's and 1960's wrote that at the beginning of primary bull markets, which of course comes at the end of primary bear markets, dividend yields will be in the 6 to 8 percent range. Anyway, when we compare apples to apples by using the same calculations as have always been used we find that there is a great disparity between the yield and the P.E. When we combine this with the phasing aspects of Dow theory, it is fairly obvious that we have not begun a "new" bull market and that the rally out of the March low is likely an important rally that will separate the next phase of the bear market.

2010 should be a transitional year. I have gone back to 1896 and have identified a common "DNA marker" that has occurred at every major top in stock market history. Therefore, based on this historical precedence I should be able to properly identify this bear market top once the cyclical aspects that have culminated to create this DNA marker appear. These developments have been and will continue to be covered in my research letters. I can tell you here that you should not believe the talking heads on TV as they did not see the problem coming in the first place. They did not warn you of the decline in 2001 or 2002, nor did they warn you of the top in housing in 2005 or the stock market top in 2007. If the potential cyclical developments that I see on the horizon materialize in 2010 then it will mean that the bear is back and I can assure you that the talking heads and politicians will not see it coming, nor will the vast majority of the public. You have been warned.

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