Here are some PM questions over the last few days that are good observations.
Question -- Was yesterday's 390 point Dow loss also a 90% down-day?
Answer -- No it was not. A 90% down-day is significant because it identifies true panic-type conditions. Every analyst is now mouthing the word, "capitulation," and "capitulation should clear the air," and "what we need is a capitulation day." As usual, these people don't know what they're talking about.
A 90% down-day is a day when down-volume is 90% of the upside plus downside volume AND ALSO down-points are 90% of upside plus downside points.
Furthermore, in a bear market 90% down-days usually come in series of four or more with short often explosive rallies separating each 90% down-day.
So far, we've yet to have the first 90% down-day.
Question -- How low do you expect this bear market to go and how long should it last?
Answer -- Although the Dow Theory bear signal came in September of 1999, the high for many stock averages came in the year 2000.
So let's say the great bull market started in 1982. This would make it an 18 year bull market. Most major bull markets are followed by bear markets that last about a third as long as the preceding bull market. On this basis, I would expect this bear market to last about six years, taking it to 2005 or 2006.
Almost all big bear markets of the past have wiped out at least half of the gains of the preceding bull market. On this basis I would expect this bear market to take the Dow down to at least 6500 and probably considerably lower.
But it's not all going to happen at once, and it's not all going to happen this year or next year. It won't be that easy.
Question -- If we have a series of say four or more 90% down-days, where could this major leg of the bear market leg end?
Answer -- This is a tough one, but I'll guess below 7000, and it will end somewhere between now and September-October.
When this major leg of the bear market ends, I would expect a very big, tradeable rally which would end sometime next year. Near the highs investors will finally become bullish again. But they'll be wrong, and they'll be too late. From that rally high I would expect the final or C leg of the bear market to take begin.
This final huge down-leg should be the most painful and costly leg of the bear market. I would expect this final C leg to take the Dow down well below 6400 to a point where both the Dow and the S&P would be selling for considerably less than 10 times earnings while at the same time they would have dividend yields of 5-6% or even more. In other words, blue chip stocks will be selling at GREAT VALUES.
Question -- Do you mean to say that what we've been through since 2000 -- is just part of declining wave A, of an A-B-C bear market pattern?
Answer -- That's right. All the action since 1999-2000 to the present is part of an unfinished A leg down. Then we should have a corrective B leg which will take the bear market to a high points somewhere next year. The B up-leg will have everyone (all the "experts") announcing and believing that this is a "new bull market." From there the worst part of the bear market will materialize. This will be the final C leg, which will take the bear market down to its final low.
This final C leg will generate the greatest amount of losses, because so many people will be aboard, and because I believe that the C leg could literally destroy the mutual fund business.
