Tuesday, August 18, 2009

Cyclical bull?

At great many signs are pointing to a new cyclical bull market (within the context of a much larger secular bear). Not the least of which is the Dow Theory primary trend change. The fact that almost everyone believes that has me worried.

I'm going to go out on a limb and say I doubt it! I think what we are seeing is probably just the normal human response to the extreme negative sentiment generated last year as the market crashed (along with plenty of liquidity from the Fed and stimulus from the government).

In 2001 the events surrounding 911 caused an extreme downward move in the stock market. After the selling finally exhausted itself the market bounced back strongly taking two complete weekly cycles to roll over and make new lows.

In 2001 the market dropped about 23% below the 200 DMA. Last fall the market moved 40% below the 200 DMA. I think we are now witnessing the upside surge as human nature tries to swing as far on the upside as it did on the downside last year.

However, I don't think we saw a 77 month 4 year cycle. The longest in history was 66 months. I believe the 4 year cycle bottomed in March of last year and we are still in the most extreme left translated 4 year cycle in history. That means we probably have much further to go on the downside than almost anyone thinks at this point.

A rally with this kind of momentum probably isn't going to roll over and die easily. I suspect just like the rally out of the 01 bottom this thing is going to chop around for a while before finally breaking down and moving to new lows possibly by the end of Nov.