The great Dow theorist, E. George Schaefer, defined primary bear markets in three phases.
“The First Phase represents abandonment of exaggerated hopes upon which stock prices were based when they reached their bull market peaks. The Second Phase reflects poor business and earnings reports as they steadily become worse. The Third Phase plunges the market to its final depths as economic deprivation forces many investors to sell against their wishes, regardless of price, in order to raise cash.”In addition to this, Robert Rhea, a Dow Theory Laureate, added “each of these phases seems to be divided by a secondary reaction which is often erroneously assumed to be the beginning of a bull market.”
If Schaefer and Rhea were alive today, the two savants would place our markets right about the end of the first secondary reaction.
We’d experienced the First Phase in 2000 to early 2003. Since then, the birth of secondary reaction (the cyclical BULL) carries us all the way to today where both DJIA and TRAN are topping out, and in a non-confirming state. Second Phase of the bear market will not crack a light until the confirmation prophecy is fulfilled, which calls for DJIA to drop below 9850 and TRAN less than 2743. But until that happens, we will keep seeing the market tread sideway as Richard Russell foresighted.
On the fundamental end, the second phase will probably be fueled by the ever shrinking power of the fiat money. The USD devaluation will drive multi-national corporations to report disappointing earnings, dragging the rest of the domestic business down with it.
On a side note, Greenspan exposed that he would raise interest rates faster if inflation is more than expected today. This makes me think that the ‘carry trade’ is NOT unwinding as fast as it should be.
posted by jason @ 8:08 PM
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