Based on my long-term studies of both Dow theory and cycles, the evidence continues to suggest that the 2007 top marked the top of a 33 year secular bull market and that we have since been operating within the context of a secular bear market. The March 2009 low has been viewed by most as having marked the bear market bottom and the beginning of a new bull market. But, based on my long-term studies this is not the case. Rather, these longer-term studies suggest that the rally out of the March 2009 low has been a bear market rally. The decline into the August/October lows has certainly shaken the bulls and excited the bears. As an example, Investors Intelligence bearish sentiment readings have exceeded the levels seen during the correction into the June/July 2010 market low and are in fact now at 2008 levels. However, my work suggests that this is all part of a much larger trap that will impact both the bull and the bear.

Let's now review the bull and bear market relationships. I have written about this before, but I continue to receive questions, so a review will not hurt and I will show you how this relates to the current situation. 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.

With that being said, the bull and bear markets of the late 1800's and very early 1900's, which 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," as it would be termed, in accordance with Dow theory, that followed was the upside portion 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 some 500% from the 1921 4-year cycle low at 63 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 976% 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 of the 1920's. 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 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 with a total advance of 2,390%. Note that once again this bull market advance more than doubled the magnitude of the preceding bull market advance, which is also another consistency.

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 truly understood Dow theory phasing 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 false break downs occurred it was a source for confusion and the premature bears were squashed. Then, when the market would recover from these false breaks, I strongly suspect that the bullish sentiment must have been off the chart. It was simply a recipe for confusion and frustration for all. The Dow theorists continued to warn, but few understood or listened to these warnings. Then, with the bullish Dow theory trend change in 1968 the public and many that blindly followed this trend change without the knowledge of the phasing were again convinced that a new bull market was underway.

However, in spite of the false breaks, the bullish sentiment, false recoveries, claims of new bull markets and the endless confusion and frustration, 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. However, the decline into the Phase II low did not begin until after the DNA Markers that have been seen at every major top since 1896 were in place and it is these same DNA Markers that are now key. This Phase II decline is marked in red on the chart above.

Based on my longer-term studies, we appear to have a similar situation today. I believe that the rally out of the March 2009 low is the rally that will ultimately separate Phase I from Phase II of this long-term secular bear market and that is it is synonymous with the rally into 1968. However, because the preceding bull market was longer in duration, the bear market that follows will also be longer as will each phase and the rallies separating each of these phases. Currently, the period since August has been a recipe for frustration and uncertainty, as history tells us was seen during the false break and sideways action in the late 1967 and into the mid 1968 timeframe.

Because the setup at the recent May high was incomplete the evidence suggests that the break into the August/October lows was probably a false break, just as was seen in 1967. As a result, the over anxious bears will likely prove to be premature. It is my opinion that the August/October lows marked a secondary low point in accordance with Dow theory and that we must now look for the occurrence of the proper DNA Markers in order to identify the setup to mark the beginning of the Phase II decline. These DNA Markers did appear at the 1968 top and every other major top in stock market history. This time should be no different and the details of these DNA Markers are covered in my monthly research letters and it will now be key to monitor these DNA Markers as the rally out of the recent lows progresses. Once the proper setup is finally in place, which could occur with or without a new high, the stage will be set for the Phase II decline to begin. Until such time, it will be a time of confusion for those that do not understand the entirety of this overall setup or the significance of the DNA Markers.

The Phase II decline is out there. The manipulation and efforts to keep the market afloat will not matter. Fixing the problems in Europe is impossible and any solution seen there will ultimately not matter either. The natural forces of the market will prevail. By understanding the environment in which we are operating and by knowing how to identify the top we can prepare for what lies ahead. I was able to identify the top in 2000, which is well documented. All throughout the 4-year cycle advance into the 2007 top I accurately warned that the efforts to prop up the markets would not work, that it was stretching the 4-year cycle and that it would ultimately only serve to make matters worse. Again, this was proven correct and my forecasts were well documented. Few listened. I am again warning. This is a time of confusion and once the proper setup is in place, the Phase II decline will come and it will be far more devastating than most imagine. But, for now, it's more confusion and uncertainty as a much bigger trap is being set.

I have begun doing free market commentary that is available at www.cyclesman.net 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.