It has now been some 19 months since the March 2009 low. Because of the duration of this rally, many are beginning to wonder how I can continue to say that it's a bear market rally and not a new bull market. The answer to this question lies with the historical bull/bear market relationships, Dow theory phasing and values.

So, let's first look at bull and bear market relationships. But, before I even begin I want to clarify that cycles have absolutely nothing to do with Dow theory. Cycles and Dow theory are two completely different disciplines. However, they can be used to compliment each other if we understand both disciplines.

Now, with that being said, the bull and bear markets of the late 1800's and very early 1900's, that Dow, Hamilton and Rhea wrote about are one in the same as the upward and downward movements of the 4-year cycle. In other words, the upside portion of a 4-year cycle was the same thing as a bull market in accordance with Dow theory and the downside portion of the 4-year cycles were the same as the bear markets in accordance with Dow theory.

But, beginning in 1921, these bull and bear market periods began to grow in duration. I feel that this is a direct result of the growth in population. As our country grew, more and more people began investing and as a result the bull and bear periods became longer. In turn, bull and bear markets evolved into a series of multiple 4-year cycle events. For example, 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, or "Secondary Reaction," that followed was the upside of a 4-year cycle that topped in only 5 months. Once this "Secondary Reaction" 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.

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 "Primary" 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 on the DJIA. Note that in percentage terms of the advance, 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, I want to 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 both a cyclical and a Dow theory 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, but in reality, that is when the new bull market became obvious. The low occurred in 1974 and Richard Russell called that low at the time using Dow theory. The bull market that began in 1974 carried price up into the 2007 top, which was a period of 33 years and consisted of a series of eight 4-year cycles for a total advance of 2,390%. Also note that with the last bull market advance running 1,076%, this bull market more than doubled the preceding great bull market, which is also another consistency.

Now, if we apply the normal bull bear relationship of approximately one-third, then given that the last great bull market ran some 33 years, this bear market should last until somewhere late in this decade. I will add to that, the more they monkey around with the natural forces of the market, the longer they are apt to drag things out and the worse it will be. Because the 2009 low occurred only 17 months after the 2007 top, that low falls far short of the normal one-third relationship that has historically been seen. Therefore, based on these historical relationships I do not believe that we have seen the bear market bottom.

According to Dow theory, each bull and bear market period has three separate phases. This phasing is an important aspect of the Dow theory that is most often over looked. The 1966 to 1974 bear market is a perfect example of a bear market, its three phases and the rallies separating each of the phases. Therefore, I will use that chart to illustrate this concept.

Referring to the chart above, Phase I of the second great bear market began at the top in February 1966. This top was confirmed under Dow theory in May 1966. From this top the market declined into the Phase I low in October 1966. This Phase I decline is marked in blue on the chart above and it carried the market down some 25%. From this Phase I low the typical rally that serves to separate Phase I from Phase II began. This rally carried the market up some 26 months and is marked in green on the chart above. During this 26 month advance you can see that there were a couple of false breakdowns that the market was able to recover from and inevitably pushed higher. In fact, with the advance into 1968 bettering the 1967 secondary high points, a traditional Dow theory bullish trend change even occurred.

But, those who understood Dow theory phasing would have understood that this was a bear market rally separating Phase I from Phase II of a much longer-term bear market and not a new bull market. I can also assure you that the longer this rally lasted the more bullish and more convinced the public became that a new bull market was underway. Also, when the market would recover from these false breaks, I strongly suspect that the bullish sentiment must have been off the chart. I'm also sure that the Dow theorist's continued to warn, but that few understood or listened to these warnings. Then, with the Dow theory trend change in 1968 I'm sure that the public was convinced that a new bull market was underway. They probably proclaimed that anyone stating anything other than this "obvious" bull market needed to be admitted for a psychiatric evaluation. After all, this was "obvious" and anyone not seeing it was obviously blind.

However, in spite of the false breaks, the bullish sentiment, false recoveries and claims of new bull markets, the Dow theory phasing prevailed and the decline into the Phase II low carried the market down some 36% to new lows over a 17 month period. This Phase II decline is marked in yellow on the chart above.

Then came the rally separating Phase II from Phase III of this ongoing secular bear market. This rally carried the market up 66% over a 32 month period. This advance is also marked in green on the chart above. Once again, the world was convinced that the bear market was over. After all, the market had made a new high. How in the world could we still be in a bear market with the market at new highs? Those Dow theorist's had to be wrong this time around because this time was different and it was "obvious" with the market at a new all time high.

But, once again, the Dow theory phasing prevailed and Phase III took the market down 45% into the final Phase III low. This low marked the bottom of the second great bear market. This time, those who understood the Dow theory were shouting from the roof tops to buy. History tells us that the public was so beaten down by the time the Phase III low had occurred that once again they did not listen to the Dow theorists. Bearish sentiment was sky high and anyone pushing stocks at this point, again needed counseling. Who in their right mind would buy stocks after suffering through these declines? However, the Dow theory phasing was proven correct and the third great bull market that ran until the 2007 top was born at the 1974 Phase III bear market bottom.

This brings us to our current chart below. From the 2007 top, the Industrials dropped some 53% over a 17 month period into the bear market Phase I low in March 2009. This decline is marked in blue on the chart below. From that low the typical rally separating Phase I from Phase II began. Just as with the 1966 to 1968 rally, the longer this rally lasts and the more false breaks we see, the more convinced the public will become that this is a "new bull market." I know from my research what this bear market rally top will look like because I have identified a common DNA Marker that has appeared at every major top since 1896. I'm covering these details and developments in the research letters and updates at Cycles News & Views. This rally will top in accordance with those DNA Markers and will allow me to identify it. Therefore, based on my knowledge of Dow theory phasing I do not believe that we have seen the bear market bottom.

Let's now look at value, which is another historical marker of secular bear markets. Historically, the dividend yield will be roughly equal to the price earnings ratio at secular bear market bottoms. I have used the S&P data here because I did not have this data as far back on the Industrials. At the 1932 bear market bottom the yield was 10.50% and the P/E was just under 10. At the 1942 bear market bottom the yield was 8.71% and the P/E was 7.3. At the next great bear market bottom in 1974 the yield was 5.9% and with a P/E of 7.24. If we take this same reading at the 1982 low the yield was 6.2% and the P/E was 6.9. For the record, these P/E ratios are based on Generally Accepted Accounting Principles and not the bogus George Orwellian methods of today. At the 2009 low, the P/E was 26 with a dividend yield of 3.2, which is hardly at par. Therefore, based on this historical measure, there is also no indication that the 2009 low marked the bear market bottom.

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