George Schaefer stated: "There are three principle phases of a bear market: the first represents the abandonment of the hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings, and the third is caused by distressed selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets."
Robert Rhea described the three phases of the bear market in a very similar way. More importantly, Rhea goes on and states: Each of theses phases seems to be divided by a secondary reaction which is often erroneously assumed to be the beginning of a bull market." Does this sound familiar or what? Rhea also states: " Such secondary movements seldom prove perplexing to those who understand the Dow theory."
Rhea says that these secondary reactions (bear market rallies) seldom prove perplexing to those who understand the Dow theory because the Dow theory student is a student of history. It now seems that the only bears left standing are all students of market history. I suspect that the market historians will likely prove once again to be right in this case as well.
A look at Value
Another longer-term historical fact that I would like to discuss is dividend yields and price earnings ratios. Historically, price earnings ratios and dividend yields have been roughly equal at bear market bottoms. When the bear market ended in 1932, price earnings ratios had fallen to less than 9:1 and dividend yields hit a high at 10.55%. In 1942, as the '42 to '66 bull market began, price earnings ratios were roughly 8:1 while dividend yields hit 8.71%. At the 1974 bear market low, price earnings ratios had fallen below 7:1 and dividend yields fell just short of 6%.
As of June 24, 2003 the GAAP price earnings ratios for the S&P 500 is at 32.85. I have recently seen reports that are showing "core" earnings are as high as 39. As of June 24, 2003, Pinnacle Data reports the S&P dividend yield to be 1.67%. It's obvious that the price earning ratios and dividend yields are at extremes as well. Unfortunately, they are at bull market extremes.
Based on today's earnings, the S&P 500 would have to sell at 303 in order to have a price earnings ratio of 10:1. Let me emphasize that this is based on today's earnings. This assumes that earnings will remain constant as the market falls. This is not going to be the case. When the market starts to fall and the consumer begins to pull back I can almost assure you that earnings will fall. No bull market has ever begun at current valuations. Based on this simple fundamental fact, how can anyone suggest that a new bull market has begun?
*(Tim Wood )
**VERY BASIC. Richard Russell hit it on the head tonight. And I have stressed dividend yields and what they tell us.
BULL and BEAR MARKETS begin and end VERY similar. ONE THING is a constant. YIELDS AT TOPS (near 3%) at BOTTOMS (NEAR 6- 10% !!!)
1980 BULL MKT began with Dow yielding around 7% YES 7% !
2000 HISTORIC LOW in YIELD 1.4% !!!
5 YEARS LATER???
ABout 2% YES 2%. Now go ahead and trade and be happy, but you are trading in an OLD CYCLICAL BULL in a SECULAR BEAR. IMHO the YIELD EVIDENCE PROVES IT!
IMHO the chart I showed of the action of the 200 and 400 WEEK SMA's PROVE IT.
KEEP your STOPS TIGHT IMHO.
I DO NOT know how or when it ends, but history WILL REPEAT, and yes you can bet on it.
Duratek
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