Prepared by Past Present Futures Newsletter
Stock Market
(January, 2001) If you listen to the media or ask the average person on the street how the stock market has been doing, they will tell you it has "crashed." The 56% decline in the NASDAQ and wipeout in the Internet sector has colored everyone's perception of what has taken place. In reality these measures do not accurately reflect what has happened in the overall stock market. Looking at the chart of the cash NASDAQ (Figure 1), after the final 5-month, 100% advance, price has returned to where it was at the October 1999 low. However, looking at the New York Composite Index which is a much better measure of the overall market and core economy, one would have to say it has been unimpressed and unmoved by the antics in the high-tech sector (Figure 2). (The New York Composite is a perfectly weighted index of all of the stocks on the New York Stock Exchange). The price of the New York Composite has remained in a fairly narrow trading channel with a slight upward bias despite the upheaval in the NASDAQ. Based upon this Index, we have been given no indication the market is in any major trouble. However, we believe a break of the October 18, 2000 low in the Composite would issue a major sell signal.
Figure 1: NASDAQ 100 Cash
SuperCharts.
In the context of our overall analysis, the divergence between the NASDAQ and the New York Composite is critical to observe. In recent issues, we have pointed out the remarkable resiliency demonstrated by the New York Composite Index in the face of the wipeout in the NASDAQ, corporate earnings shocks, high oil prices and election uncertainty. Despite new lows being established in the NASDAQ and S&P 500 during the month of December, the New York Composite established a higher bottom above the October 18, 2000 low. As a result, this low represents a psychological price point, which must hold in order for the overall market to remain in a long-term bullish position.
There are two other reasons the October 18, 2000 low is pivotal. Since establishing the major low in 1984, the New York Composite Index has not experienced a correction exceeding 3 months, 20 days. We keep harping on this, but we cannot emphasize it enough. In our last issue we said, "in the absence of this overbalancing of time, the geometry of the bull market has remained intact. In order to overbalance the longest time periods since 1984, this Index would need to decline more than 3 months, 20 days off the all-time high on September 11, 2000. This would require a decline to new lows (beneath the October 18 low) after December 31, 2000." Now that we have passed this December 31st date, this October 18 low is a live price point. If it is broken, we will be given a monumental indication the bull market is complete and it is time to go short.
The third reson we can attach great significance to the October 18,
2000 low is based upon our Master Time Factor cycles. This is something
we have not been able to do until now. In Table 1, we show W.D. Gann's
Permanent Chart of the major lows in the Dow Jones Industrial Average which
shows the years when historic lows were established. (The low in the Dow
Industrial Average was also made on October 18, 2000). As you can see,
there have been 7 instances when historic lows were established during
the "0" year. These historic lows occurred on December 8, 1890, September
24, 1900, July 26, 1910, October 25, 1960, May 26, 1970, March 27, 1980,
and October 11, 1990. Four of the seven occurred between September 24,
and December 8, with each supporting major advances. We believe the combination
of these cycles bottoming and the uniform time periods of the declines
since 1984 explain why price has been resilient. Taken together we would
have to argue the New York Composite will remain in a bullish position
unless the October 18 low is broken.
| Table 1
W.D. Gann's Permanent Chart Of The Dow Jones |
|||||||
| 1880 | 1900 | 1920 | 1940 | 1960 | 1980 | 2000 | 2020 |
| 1879 | 1899 | 1919 | 1939 | 1959 | 1979 | 1999 | 2019 |
| 1878 | 1898 | 1918 | 1938 | 1958 | 1978 | 1998 | 2018 |
| 1877 | 1897 | 1917 | 1937 | 1957 | 1977 | 1997 | 2017 |
| 1876 | 1896 | 1916 | 1936 | 1956 | 1976 | 1996 | 2016 |
| 1875 | 1895 | 1915 | 1935 | 1955 | 1975 | 1995 | 2015 |
| 1874 | 1894 | 1914 | 1934 | 1954 | 1974 | 1994 | 2014 |
| 1873 | 1893 | 1913 | 1933 | 1953 | 1973 | 1993 | 2013 |
| 1872 | 1892 | 1912 | 1932 | 1952 | 1972 | 1992 | 2012 |
| 1871 | 1891 | 1911 | 1931 | 1951 | 1971 | 1991 | 2011 |
| 1870 | 1890 | 1910 | 1930 | 1950 | 1970 | 1990 | 2010 |
| 1869 | 1889 | 1909 | 1929 | 1949 | 1969 | 1989 | 2009 |
| 1868 | 1888 | 1908 | 1928 | 1948 | 1968 | 1988 | 2008 |
| 1867 | 1887 | 1907 | 1927 | 1947 | 1967 | 1987 | 2007 |
| 1866 | 1886 | 1906 | 1926 | 1946 | 1966 | 1986 | 2006 |
| 1865 | 1885 | 1905 | 1925 | 1945 | 1965 | 1985 | 2005 |
| 1864 | 1884 | 1904 | 1924 | 1944 | 1964 | 1984 | 2004 |
| 1863 | 1883 | 1903 | 1923 | 1943 | 1963 | 1983 | 2003 |
| 1862 | 1882 | 1902 | 1922 | 1942 | 1962 | 1982 | 2002 |
| 1861 | 1881 | 1901 | 1921 | 1941 | 1961 | 1981 | 2001 |
Note: Although the October 18 low represents a minor low based upon the overall 10% decline, we nevertheless attach great significance to the timing of this low it with the bottoming of our master time factor cycles.
In summary, a decline beneath the October 18th low would break a psychologically important price point, overbalance the longest correction in 17 years and brush aside all of the "0" year bullish cycles. We would interpret this as one of the most bearish indications any market has ever given. As you can see in the Permanent Chart, the two major lows in the "1st" year did not occur until September 25, 1911, and August 24, 1921.
Therefore, if the October 18 low is broken, we would have a cyclical argument for lower prices at least into the fall of 2001. However, the higher probability would call for continued lower prices into a final low in the "2nd" year as occurred in 1932, 1942, 1962, and 1982.
Looking at the monthly chart of the New York Composite, you can see how stretched out this Index is after the 17-year advance (Figure 3). After a similar advance to the final top in 1989, the Japanese Nikkei declined 64% by 1992 (Figure 4). As we write these words, the Nikkei is flirting with new lows for the bear market. These have been difficult years for participants in the Japanese economy. If our market breaks down from here, our research suggests we will be in a similar bearish position to what took place following the 1989 high in Japan.
Figure 3: Monthly New York Composite Cash
Figure 4: Japanese Nikkei 1974-2001
SuperCharts.
Note: Based upon the 60-year cycle, a final rally high occurred
on November 9, 1940 (Figure 5). Once this high was in place, the stock
market experienced a dramatic bear market into a final low on April 28,
1942. If the October 18 low is broken, the full weight of this bearish
cycle would likely be felt in our market.
Figure 5 S&P: 60-Year Cycle
Note: This statement in our November issue summarizes our attitude about the stock market. "If we have indeed established a historic low in commodity prices and a final top in the stock/commodity ratio, the long-term implications are ominous for the average investor. Based upon this forecast, at best the stock market has become a trader s game which will ultimately succumb to a major bear market. At worst it is vulnerable to a dramatic bear market which could unfold at any time."
Strategy
If the October 18 low is broken, we believe aggressive shorts can be initiated for what would be an ugly, long-term bear market which would shave at least 40% off the Composite. To be honest, we hope this does not happen. As an investor, we believe this breakdown would demand an extremely defensive posture in the stock market.
Technically, a break of the contract low at 629.50 in the March New York Composite would likely be a breakaway point for a continued liquidation.
Precious Metals
The completion of the 60- and 30-year cycle lows in the fall of 2001 are going to present a dynamic opportunity for what should be a potential runaway bull market. In our last issue, we showed the parallels between the 1914-1940 period and our current period between 1974-2000 (Figure 6). To better accentuate the price swings during the 1974-2000 period we have changed to a semi-log price scale (this plots the percentage changes in price rather than the nominal [actual] price changes). Based upon this cycle, a final historic low should have been established at $3.50 on February 22, 1991 against the February 16, 1931 low. If we follow the 60-year pattern, our market would establish a higher bottom in 2001 above the $3.50, followed by a long-term historic bull market similar to what happened after the 1941 low.
Figure 6: Silver: 60-Year Cycle
Note: Based upon the 30-year cycle, after a final low on November 27, 1971, the price of silver advanced 400% by February 27, 1974 (Figure 7). The timing of this cycle low was the same as the 60-year cycle. However, the bull market advance was much more aggressive.
Figure 7: Silver: 30-Year Cycle
Gold Versus Silver
The other side of the precious metals equation is the historic position of the gold market. Since the price of gold has been fixed during most of its history, we do not have any master time factor cycle projections prior to 1971. However, Homestake Mining (a large gold stock) has been trading since 1878. Using this stock price as a proxy for the price of gold, we have an important projection for a 60-year cycle low. In Figures 8 and 9, I show monthly charts of Homestake Mining between 1935 and 1947 and the XAU Gold Stock Index between 1986 and 2001. Notice the high in February 1996 in the XAUcoincided exactly with the high in February 1936. Based upon this cycle, we would not expect a final low in gold stocks (gold) until 2002 against the October 1942 low. This low coincided with a major low in the over-all stock market. Based upon this cycle it is still too early to make gold purchases. Based upon this 60-year cycle we would expect silver to bottom before gold. If so, we should favor silver purchases over gold purchases once our projected low is in place.
Figure 8: Homestake Mining Monthly 1934-1947
Figure 9: XAU Gold Stock Index
SuperCharts.
In 1991 it was our contention a double top was being established
in the gold/silver ratio against the 1941 high at 102 to 1. We felt this
would set into motion a long-term shift in the value of silver relative
to gold (Figure 10). Since then, the ratio has declined to as low as 39.
(Each ounce of gold was equal to 39 ounces of silver). Based upon this
realignment, one would expect the gold/silver ratio to return to its long-term
support at 16 to 1. Looking at the weekly chart since 1991 (Figure 11),
you can see this ratio has been making lower lows and lower highs. During
the current decline in the price of gold and silver, the silver has been
weaker than the gold. This has resulted in the ratio advancing to as high
as 60. We believe this is a isbear market rallyli. Once the silver bottoms,
we would expect it to significantly outperform the gold market thereby
resulting in the ratio declining to new lows.
Figure 10: Gold/Silver Ratio: 1910 - 2001
Figure 11: Gold/Silver Ratio: Weekly
SuperCharts.
Coffee
The bear market we have experienced in the coffee qualifies as one of the greatest of all time in any market. Based upon price, the current 81% decline ranks as the 2nd worst bear market in history behind the 82% decline in 1931 and ahead of the 79% decline in 1921. Based upon time, our 3 year, 7 month decline is just off the 2nd and 3rd longest bear markets in history which both lasted exactly 3 years, 7 months and 14 days. Notice that each of these lows were established during the "1" year master time factor lows on March 16, 1921, and April 16, 1931. This suggests we still have some work to do at the lows before the historic bottom is in place.
Note: In the context of every bear market in history in any commodity, ours ranks as the 6th greatest based upon price and 19th longest. This is an extremely mature situation.
Historic Declines In Individual Commodities
The old Wall Street maxim says to buy low and sell high. Based upon
every calculation, the grains and soybeans are not only incheapli in terms
of price but the length of these bear markets indicates they are extremely
mature. In Table 2, we show the current percentage declines in wheat, corn,
oats and soybeans and how the current bear markets rank relative to every
bear market since 1877. As you can see, the decline in the PPF Grain Index
ranks as the 3rd greatest in terms of price and 3rd longest in history.
Only the 1921 and 1932 bear markets experienced greater percentage declines.
Even more telling is the fact that the 60-year cycle decline into the 1939
low ranks as the 4th greatest decline.
| Table 2
Historical Perspective Of Grain Declines |
||||
| % Decline | Rank | Time of Decline | Rank | |
| 1. Wheat | 70% | 3rd | 3y, 8m, 23d | 6th |
| 2. Corn | 69% | 7th | 4y, 1m, 02d | 6th |
| 3. Oats | 68% | 5th | 4y, 2m, 07d | 5th |
| 4. Beans | 56% | 3rd | 2y, 2m, 02d | 7th |
| 5. Grain Index | 67% | 3rd | 4y, 3m, 16d | 2nd |
Figure 12: Soybeans Adjusted for Inflation (CPI)
The decline in the soybeans to 401-1/2 on July 9, 1999 broke the 1975
low at 439-1/2. Indexed for inflation, this decline carried price to its
lowest level in history (Figure 12). The important principle to keep in
mind is that the greater the bear market, and extreme of under valuation,
the greater will be the bull market which follows. It is the law of action
and reaction. The implication is we have completed one of the greatest
turning points of our lifetimes. We believe we must continue to remind
ourselves of these overall dynamics. While it is true the huge carrying
charge premiums continue to weigh on the grain and soybean sectors, once
the buying lows are in place, we will be looking at a historic bull markets.