1998 all Over Again?

The Dow is about to begin its final rollover for the year, eventually testing the critical 7400 cycle low last achieved in 1998. Based on this and other parallels between 2001 and 1998, we were led to do a comparative analysis of the two years and draw inferences as to what it projects for the near future.

It is interesting to note the many remarkable similarities between October 1998 and October 2001. Back in 1998, the U.S. market had experienced a precipitous plunge of approximately 2,000 points in just under three months for a total loss of 22%. At the same time the global economy itself was melting down-catalyzed by the LTCM/Russia debacle-and seemed on the verge of an all-out fatal collapse. Then along rode Fed Chairman Alan Greenspan to the rescue (according to the popular financial press). After successively lowering interest rates the Dow reversed in V-bottom fashion and powered onward to new highs in October of that year.

Flash forward three years later to October 2001 and the similarities are amazing. Now, as then, the U.S. market has slumped by over 20% and most foreign financial markets have followed a similar trajectory. The percentage loss for this year has actually been greater than in 1998, only this year's losses have been more of a slow roll-over rather than a quick three-month decline. As in 1998, Greenspan and Co. have attempted to reverse the market's fortunes by lowering interest rates several times, mostly to no avail. But lately the market has sprung to life again and the chart pattern in the Dow and many leading Dow components is nearly identical in some respects to the type of chart pattern commonly seen in the fall of 1998. Could history be repeating? Can we expect an all-out reversal leading us well into 2002 before the next big leg of decline resumes?

The answer to those questions cannot be answered with a simple "yes" or "no" answer. Suffice it to say that in many respects the outcome should be similar to 1998. There will likely be one more sell-off this month, perhaps establishing a slightly lower bottom before the ultimate rebound propels the major indices higher into the end of the fourth quarter. After a peak in late 2001/early 2002, expect a resumption of the long-term sell-off that began in 2000. Year 2002, based on cycle considerations, should be worse than 2000-2001 combined. As we have mentioned many times before it should be a great year for short selling, and the Prudent Bear Fund should perform especially well.

A survey of the charts of leading bank and brokerage stocks, as well as the top mining issues, provides direction for the fourth and final quarter of 2001. By all early indications, the final two months of the year should finally witness the long-awaited bear market rally before things really get out of hand early in 2002.

A reader commented recently that the old relationships among various markets and market sectors seems no longer to apply after the past year or so of a treacherous trading environment. To take one example, it has been remarked that the inverse correlation between bond yields and stock prices hasn't worked as a reliable market indicator in nearly two years. Many wonder why. The reason for this-and many other disconnects-is the fact that for the first time in over half a century the major long-term economic and financial cycles which govern price relationships have turned down hard and in many cases are out of synch. This happens at least once every 55 years in the final deflationary phase of the economic K-Wave cycle. The master 120-year and subcomponent 60-year financial cycles are also in the declining phase and this is weighing heavily upon equity markets.

Friend and cycle expert Samuel J. Kress points out that this year should have been a "rally" year due to the position of the short-term and interim cycles, plus the fact that it is an alternate year in the two-year cycle, yet this upside potential failed to materialize. "Clearly," says Kress, "this indicates the negative pressure of the declining long-term cycles. As additional evidence, under merely lateral conditions, the [Dow] peak on July 20th would have been higher than the May 18th peak." Like yours truly, Kress also anticipates a final year-end rally to close out 2001 before the super bear market decline of 2002, a decline which should persist throughout most of the year. Incidentally, most of the rallying potential later this fall will be found in the beaten-down tech stocks.

The long-term cycles, as we have often pointed out, are all converging downward into the year 2004 and are in severe deflationary mode. There is no greater benchmark of deflationary pressures than interest rates. The bond market is sending an undeniable deflationary signal that just keeps getting stronger. The yield on the 13-week Treasury Bill has plunged to its lowest level of the past decade this year alone. Right now yields are nearing a meager 2% on the T-Bill! The yield on the 5-year note isn't much better, and the chart of the 10-year T-Bond is still pointing downward for the next few months. Bonds are screaming "deflation!" yet economists and financial commentators take little notice of this extraordinary phenomenon, which implies economic depression on the horizon. It has been pointed out to us that the first true great depression the United States ever had was in the early 1880s, just before the 120-year master cycle and the 60-year long-wave cycle bottomed. The next greater depression took place during the 1930s, also just before a 60-year cycle bottom. The next depression, which will be the greatest, won't end until near the end of this decade. In the realm of economics, as with everything else, everything always happens in threes, and America's third Great Depression is now well on its way.

The gold market is coiling in preparation for a strong upward thrust, with the area pattern projecting to the $400-$425 area sometime between now and early 2002. The intermediate-term cycle channel for gold futures also support this upside objective. Silver has seen its 120-week cycle bottom this fall just as we predicted earlier this year. Already the cycle channel for silver is turning up and silver looks good to go for the next few months. The gold market has not looked this good in a long time. Accordingly, there is plenty of short-term profit potential in the precious metals sector.