Based on the longer-term phasing and valuation aspects of Dow theory, it is my continued belief that the advance out of the March 2009 low has been a bear market rally. Specifically, based on my analysis and the data at hand today, I believe that this rally will ultimately prove to separate Phase I from Phase II of a much longer-term secular bear market. Historically, Phase II declines are the most devastating and it is my belief that once this bear market rally has run its course, the deflationary fallout into the Phase II decline will be far worse than what was seen between October 2007 and March 2009.

Now, with that being said and within the context of this bear market rally, the averages also triggered a traditional bullish primary trend change in association with the advance up out of the 2009 Phase I low and I believe that bullish primary trend change is currently still intact. Yes, I think that the advance out of the March 2009 low has been crippled and obviously the events seen in May were not good. Nonetheless, I do not see any evidence in accordance with Dow theory that the bullish primary trend change, associated with the counter-trend bear market advance, has been reversed at this time.

In accordance with Dow theory it is the close that counts, not the intraday high or low. Also in accordance with Dow theory, the primary trend is considered to be in force until it is reversed by a joint move of the averages with a move above or below the previous secondary high or low point. In the case of an advance, a move below the previous secondary low point is required. I have received numerous e-mails asking me if the recent violation of the May 7th closing low constituted a bearish primary trend change. In my eyes, the answer is no. I believe that the move down into the May 7th closing low was part of the same move that carried the market to the most recent lows. In other words, I do not believe that the May 7th closing lows were of the proper degree to have marked a secondary low point.

Let me make it perfectly clear that cycles have absolutely nothing to do with Dow theory. Cycle theory and Dow theory are two separate tools, but they can be used to compliment one another. I know that secondary low points in accordance with Dow theory correspond with intermediate-term cycle lows in accordance with cycle theory. Given that I have tools to help me identify the intermediate-term cycle lows, this in turn allowed me to know that the intermediate-term cycle low was not made at the May 7th low. Thus, I knew that the secondary low point in accordance with Dow theory was not made either. We know that once the intermediate-term cycle low is confirmed that that low will also mark the secondary low point in accordance with Dow theory. It will then be what develops from that point that will be key in accordance with Dow theory and I will be covering these developments as they unfold at Cycles News & Views in my short-term updates and research letters as they occur. The current Dow theory chart can be found below.

Next I have included a weekly chart of the Dow Jones World Stock Index. Here too, you can see that this index peaked in November 2007 and fell into its Phase I low in March 2009. Like the U.S. markets, I believe that most foreign markets have also been in bear market rallies since early 2009. I have said for years that the deflationary forces of K-wave winter is a global phenomenon. With the credit issues now surfacing overseas, this is proving correct. The developments seen on this chart in May are representative of the global nature of this bear market and I stand by my analysis that when the Phase II decline gets into gear, it is going to be far worse than Phase I and farther reaching as well. Also, the credit crisis that continues to materialize will deepen and is a direct result of the forces of the deflationary K-wave winter that I believe lies ahead.

It has been a while since I have shown you the checklist associated with K-wave winter. We can all tend to forget things so I have again included this checklist from David Knox Barker's book The K- Wave.

"Global Stock Markets Enter Extended Bear Markets"

I have said since 2007 that this is where we are and ever since the 2009 low I have explained that we have been in a bear market rally. The Phase II decline is out there and it will be global in nature.

"Trends During Winter: Stocks Down, Bonds Up, Commodities Down"

I believe that the bust in commodities in 2008 was associated with this trend change and that since the 2009 lows, commodities have also been in bear market rallies.

"Interest Rates Spike In Early Winter Then Decline Throughout"

In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25%, and in August 2007 the Fed once again began to cut the Discount rate. This too fits.

"Economic Growth Slow or Negative During Much of Winter"

I doubt that many will argue this point at this time.

"Commercial and Residential Real Estate Prices Fall"

This obviously began back in 2006 and is still ongoing.

"Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy"

This has obviously begun and was no doubt been related to the housing and credit bubbles. But, I suspect it will worsen as the Phase II decline and the deflationary forces take hold once again.

"Social Upheaval and Society Becomes Negative"

Just wait!

"Banking System Shaken and New One Introduced"

The banking system was shaken in 2008, but there should still be more to come.

"Free Market System Blamed and Socialist Solutions Offered"

Just wait, we have only seen the beginning!

"National Fascist Political Tendencies"

More to come.

"Debt Level Very Low After Defaults and Bankruptcy"

This has not happened.

"Trade Conflict Worsen"

It's coming.

"View of the Future at a Low Ebb"

When the cheerleading on CNBS stops, we will be there.

"New Work Ethics Develop Since Jobs are Scarce"

If I can assure you of one thing, it is that this has not happened.

"Greed is Purged from the System"

I can absolutely assure you that this has not happened yet.

"Real Estate Prices Find Bottom"

This has not happened.

"There is a Clean Economic Slate to Build On"

Not happened yet.

"Investors are Very Conservative and Risk Averse"

Again, this has absolutely not occurred.

"Interest Rates and Prices Bottom"

Not happened.

"A New Economy Begins to Emerge"

Has not happened

"Stock Markets Reach Bottom and Begin New Bull Markets"

Again, we aren't there yet.

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.