Dow Theory Review
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On August 2, 2011 (article here), we said that a new bear market had begun.
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On August 9, 2011 (article here), we announced that, based on the closing price of August 8, 2011, a bear market rally would ensue (stock prices would rise.) That call was 2 months ahead of the ultimate market bottom set in October 2011 and off the actual low by 1.43%.
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On March 16, 2012 (article here), we warned about the lack of participation of most stocks in the rise of the stock market from the 2009 low. Additionally, we cited the divergence between the Dow Jones Industrial Average and Dow Jones Transportation Average as confirmation that we were still in a bear market. This was less than 1% from the actual top in the market.
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On May 19, 2012 (article here), we pronounced that the bear market rally had ended. This call came 7.41% below the actual peak in the market on May 1, 2012.
Charting a Path for the Dow
Now comes the challenge of determining the downside targets for the Dow Jones Industrial Average. To accomplish this task, we’ve gone back to the secular bear markets of 1906-1924 and 1966-1982 for some insight as to what might occur going forward. It is important to understand that the signature of a secular bear market is that it will not increase very much above the initial peak and declines significantly below the initial peak multiple times.
In the chart below, we have the price action of the Dow Jones Industrial Average from 1906 to 1924.
In the chart below, we have the price action of the Dow Jones Industrial Average from 1966 to 1982.
There is considerable debate about where the peak of the current secular bear market began. Although we believe that the secular trend began at the 2007 peak, we’re being conservative by considering that the most recent secular bear market began at the 2000 peak, as represented in the chart below.
Beneath each trough is the number corresponding to the major declines within the secular bear market. In each chart there are at least three major market declines while the peaks remain in close proximity to the original market peak.
It is our view that the first decline of the Dow Jones Industrial Average in the secular bear market trend later becomes a minimum downside target. In the current market, we believe that the Dow Jones Industrial Average will revisit the 8,200 level. If the Industrials were to revisit the 8,200 level, the total decline would be approximately -32% from the closing price of June 1, 2012.
