Replaying 1929 4 Weeks to 8300

Bull Market Dead!  When you look at how the last Bull market ended (and compare it to what is transpiring today), you get an odd feeling. You'll see what a peculiar week this was.

The market tanked more than 400 points, yet the underlying damage was not being taken seriously. For example, after losing nearly 200 points on Thursday (7/23) the Put to Call Index was only at .59 (59% of the options were Puts - where nearly 2/3'rds of the players were still betting on new highs to come. It's an amazing demonstration of cocky self-confidence based on vapor - and it shows the underlying weakness of the market.

Markets usually crash (or crumble) to the opposite of the directional confidence by the majority. Translation? The "buy the dips crowd" has been set up to get slaughtered. Since the top is most probably in, I am correlating the just completed top with the 1929 top in the chart.

Personal positions: Still holding Dell Nov. 90 puts (in at $475 per contract last week, and was about $775 on Friday) , & Sept S&P puts - 950's and 750's. Whisper word from BIG money is that the NDX100 is heading for under 1200 sooner than later.

Short Term Targets Announced: You can look at this week's chart and see where this market will likely head. The typical start of a serious Bear Market (like the one which followed the Crash of '29) begins with an approximate 15% decline from the top. Therefore, we feel pretty confident that the initial downside target from a high of 9363 should be about 7960 - pretty much non-stop from a long-term perspective. We estimate the time horizon for this decline to be a month or two. Of course, the initial drop might be less - only about 12-13% on a weekly basis. Correlating the current market with the 1929 scenario, we see a DOW at 8315 soon. How soon? Well, if the market had closed Friday (7/24) very close to 8890, the chart would predict only three weeks. With the market closing Friday (7/24) at 9007, it would have meant four weeks. However, since it was between these two points, I would still opt for the longer target, simply because this Bull is taking a little longer than its predecessors. Write down this date: August 21, 1998. We should see the 8315 region around then.

Then a BOUNCE: The track in 1929 suggests that there will be a dramatic bounce within a week after touching this 8315 target. When I say bounce, I mean a huge resurgence, probably based on something a politico will be forced to say. Who and when? Write this down:Bounce to 8700 one week from 8315.

And then what? Then, unfortunately for a lot of people in 401-K programs, this can get seriously ugly. Not just "flogged", genuinely whupped with the ugly big stick! Under 6000 ugly. People with better (and longer) track records than mine are talking about 5600, and some even mention under their breath 4000. I think that's a tad excessive pessimistic for this year. We should end the year at 6775 on the present track - and pop up to 7200 by next February before the erosion of the market accelerates down again.

As I said last week: By the end of October the market should be at 5717 on a weekly closing basis with the week ending 10/16 the target if last week's close is the high. Since this cycle has life to it, the actual low may come as late as the end of November - and still be consistent with the underlying premise of this page, namely that the run up now parallels the 1920's euphoria.

Personal Planning guide

If you would like to order the personal planning guide (individual plan 24 pages, $10, corporate crash plans, quoted by request depending on depth of research) send me an e-mail and I will send you details. These will mail on August 29th.

On the Chart: Red is the DOW run up from 1987 to present - and black is the run-up from 1920 to 1929, and subsequent meltdown from 1929 to about 1931.

(Updated 7/24/98)

In a truly remarkable display of its sense of history, and the significance of repetitive patterns, the market today shows another "Sign of the Bear." For those of you who failed to read my May 4, 1998 article in Barron's (shame on you), let me try and quickly describe the "sign of the bear." First of all, be aware that between 1928 and early 1998, there were only five such patterns in that 70+ year time span. The dates were:

1) July 19, 1929

2) December 8, 1961

3) January 25, 1966

4) October 17, 1968

5) December 6, 1972

The pattern begins with what I call a "churning" pattern. A churning pattern consists of 21 or more consecutive days (the number of market days in the average month) where the highest daily advance/decline ratio is below 1.95 and the lowest ratio is above .65. In other words there are no big up days nor are there any big down days. So long as the number of consecutive churning days remains between 21 and 27, the next important factor is how the streak ends. The streak ends when a day has a ratio higher than 1.95 to 1 or lower than .65 to 1. Take an average of the 2 days following the streak and 3 days following the streak. If either average is below .75, you have the "sign of the bear." The dates mentioned above are the dates of the 21st consecutive day of churning. When we wrote the article in late April prior to its early May publication, we included some cyclic analysis that looked for a twin peaks formation on the Dow, with the first high focussed on May 19 plus or minus 2-3 weeks and the second and final top focussed on July 29, 1998 plus or minus a few weeks. The mid-May projection was almost perfect with the Dow making its first closing high on May 13. Richard Rescigno, the managing editor of Barron's asked me to cut down the size of the article, so I removed the cycle analysis. I finished the article by writing, "Because our cycles allow for a final top as late as August 1998, we have to allow for that possibility. If the market is making new highs beyond the end of May, then the power of the April signal will have dissipated. In that case we would look for the possibility of another "sign of the bear" prior to a July or early August top....." Mind you, the market in the past has gone more than two decades without even one sign of the bear being seen. It blows us away that we have just seen another sign of the bear within less than four months of the last one and just at or before the time period when we looked for the second and last of the twin peaks.

Be aware that the sign of the bear usually occurs before the final top, but not by long. This truly startling occurrence makes a major market top a very high confidence item in this time period.

These are truly exciting times.