What The Past Can Tell Us.

1970s Bear Market

1930s Bear Markets


Inception: The Dow Jones Industrial Average opened at 40.94 on May 26, 1896.

Lets closely examining data regarding Dow milestones and secular bear markets. I’ve included tables above and brief notes. After a quick review, these charts revealed an important pattern.

Inference

Not all milestones are equal. The Dow appears much more attracted to certain psychological levels (i.e. 100, 1,000, and 10,000). While it seems to race to these important levels, the Dow has a much more difficult time leaving them behind.

Why This Matters

The market’s propensity to linger at such levels creates an opportunity for those who can correctly identify when the index has, in fact, departed 10,000, or when it will.

Next, I examined bear-market lows for clues. (chart above)

Key Observations

In the first bear market, the low occurred almost three years in. It took another 10 years to leave the 100 level.

The low occurred later in the second bear market -- a full seven years in. Still, it took the Dow another eight years to leave behind the 1,000 level.

In March 2009, the Dow put in a low nine years into the present bear market.

A Starting Point

The bear market low provides a starting point. From there, the market must work its way back into shape before finally conquering key psychological levels and ultimately transitioning to a secular bull phase. That repair takes much time -- eight to 10 years from the low, history would suggest.

To the Charts

Starting with the bear market low, I’ve examined the charts of the two previous secular bear markets looking for similarities. But, first let me make a point about an obvious difference in the two charts. In the first, the Dow spent most of its time above 100; in the second, the Dow remained stuck below 1,000 for the entire bear market. Despite this important difference, the result was nearly the same: It took eight to 10 years after the low to finally leave behind the key psychological level.

About the Charts

Above are monthly charts of the secular bear markets. The key psychological level is clearly shown with a blue horizontal line. The moving averages are set at 10 and 20 months to approximate the 200- and 400-day moving averages. Yellow highlights signify a negative cross (10 crossing below the 20), while green highlights indicate a positive cross (10 crossing above the 20).

Golden Crosses

In technical analysis, a crossover involving an index’s short-term moving average breaking above its long-term moving average is referred to as a “Golden Cross.” This is because the crossover is supposed to signal a new bull market. However, that’s not always the case. Markets aren’t that simplistic.

The Golden Cross (highlighted in green) is quite instructive, though, in my investigation. Take a moment to review the charts. I’ll meet you on the other side to share my findings.

A Pattern Is Revealed

In both cases (1933 and 1975), the first Golden Cross led to more upside -- significantly so in the 1930s. But, these markets didn’t run away. They came back and spent five years trading sideways. Multiple moving-average crossovers occurred (positive and negative) during this time.

Interestingly, in both cases it was the third Golden Cross that led the Dow away from the key psychological level (100 or 1,000).

Go back to the charts and see for yourself. Beginning with the bear market lows of 1932 and 1974, count out the number of Golden Crosses that occur before the 100 and 1,000 levels are left behind for good.

Interesting, harh?

Easy as 1-2-3

Intermediate- and long-term investing should be informed by such market analysis. Don’t rush to buy after the market has run so far, so fast. A disciplined and patient approach will serve investors much better.

In fact, a tremendous amount of patience may be needed.

Based on the results of my investigation thus far, I’d say we may see Dow 10,000 again as far out as 2017 or 2019.

In the meantime, I’ll be counting crosses – 1… 2… 3!