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Dow Theory, The Elections and QE II

The primary trend change associated with the rally out of the March 2009 Phase I low still remains intact in accordance with Dow theory. We do have other tools and the DNA Markers that have occurred at every top since 1896 that are also very important and are being closely monitored. However, in according to orthodox Dow theory, the counter-trend bear market advance separating Phase I from Phase II of the longer-term secular bear market still remains intact at this time. But, I still maintain that once the I's are all dotted and the T's are all crossed, in accordance with this setup, the rally separating Phase I of this long-term secular bear market from Phase II will be followed by the resumption of the bear market that began in 2007.

History shows us that bear markets run about a third the duration of the preceding bull market. With the preceding bull market having run 33 years from the 1974 low, the 17 month decline into the March 2009 low was not THE bottom. As price moved down into the March 2009 low I began telling my subscribers that the rally out of that low would be a rally of a higher degree and that the longer the rally lasted the more dangerous it would become. What I meant by that was that the longer the rally lasted, the more convinced people would become that the THE bottom had been seen. At this point, there seems to be very few who even have a return trip back to the March 2009 levels on their radar screens, much less a continuation of the longer-term bear market. So, in that regard the bear has done a pretty good job of convincing the public that the bottom is place.

As for the election, I find it pretty disgusting. It does not matter if one is Democrat or Republican, it is the same old crap and the reality is, nothing will change. Politicians will do what politicians do best. That is create more bureaucracy and spend more money. If there is one thing we can be sure of, it is that absolutely nothing will change as a result of the coming mid-term election. Oh, there may be a few changes in the parties here and there, but that means nothing. In the end it will be more of the same. These people do not understand how we got into the mess that we are in and they certainly don't know how to fix it and even if a few of them did, you could not get them to agree on it. Fact is, it is the politicians who have helped to screw things up and to get us where we are. Yet, the funny thing is, people keep turning to the same Republican and Democratic buffoons to "fix" things. In reality, I hate to rain on the party, but to expect some miraculous change as a result of the coming election is probably not a reality. I sincerely hope I'm wrong, but I doubt it.

Now, with that being said, the other big event next week is the Fed announcement on quantitative easing, which gets back to the writing of still more checks. The plan is to stimulate the economy by means of liquidity and asset purchases all in an effort to stimulate borrowing and consumer demand. It seems that the great debate now is whether or not this will work. My belief is that it will not work, at least not in the long-term. I told my subscribers all through out the post-2002 period and into the 2007 top that all the efforts by the powers that be to "fix" things would serve to only make matters worse and that these efforts would ultimately fail. That is exactly what happened. During the post 2002 to 2007 period they were able to stimulate borrowing and to create the housing bubble, which "fixed" things for a while, but in turn only made matters worse. This time around, there is no housing bubble to create. The consumer is tapped out while bankruptcies and foreclosures continue to mount. In light of these facts and the current landscape, I fail to see how QEII can stimulate borrowing or consumer demand and without that borrowing and demand I fail to see how QEII can be successful in the long run. Perhaps in the short run we may see some positive results out of the hope and false expectations that it will work. But, in the end because of the state of the consumer and the underlying poor economy, QEII will most likely be a failure and the elections will not ultimately matter.

The current Dow theory chart can be found below. What does matter is price and how price affects the Dow theory, the cycles, the statistics and the DNA Markers that have been seen at all major tops since 1896. Everything else is short-term noise. The Phase II decline and the resumption of the bear market is out there.

Dow Industrials and Transports

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.

 

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