It’s mid June 2009 and I’m going to be arguing the case for the extreme Bear.
First let’s quickly review the market. From the high in October 2007 to the Low in March 2009 the SP500 fell nearly 58%.
To date (that’s early June 2009) the SP500 has retraced almost one third of that loss.
The SP500 has already recently tested the early January high which was the high for the year. Since that point public sentiment has become measurably more bullish. Actually to a level more typically seen at a market top and certainly the sort of level of bullish enthusiasm you would expect to see at the top of a bear market rally.
You’ve probably heard the phrase that “bull markets climb a wall of worry” – well there doesn’t appear to be much of a wall of worry left any more. At least as far as the retail investor is concerned.
And so, if this is a bear market rally, and I believe it is, then sentiment is fast reaching unsustainable levels.
But why am I so bearish? Why do I think this isn’t already a new bull market and we’re just due a normal kind of bull market correction? Why the meltdown scenario?
That’s a good question – and I want to answer that by showing you a chart. It may be the kind of chart you’re not familiar with so initially let me offer an explanation here.
This is an example of what I call a price-time chart. This chart shows a normal bar chart in the foreground which happens to be a 1 minute chart of the SP500-emini futures, and on the left the price-time distribution profile which shows how much time is spent at each price.
And you can see on this chart that most time was spent just above 930 – that’s the red horizontal line here. It’s a very important level because it shows you which price attracted the most time. And as you can see above, time is an important component in this formula that I’ll come back to in a second.
You can use these charts over any time period using any timeframe.
Here’s a chart covering a week’s activity using 5 minute bars and here you can see that most time was spent just above the level 940 over the period of that week. If you want to find out more about these charts then you should start by googling “Market profile” and start with the work of Peter Steidlmayer.
Here’s the point I want to make (here’s a chart based on hourly bars which covers a long period of time on the SP500 cash index, all the way back to 2003) – one of the useful things with this kind of chart is that we can let the chart tell use where value is according to the formula:
Price + Time = Value
That makes sense if you think it through.
Value is simply where the chart spends most time and with this type of chart you can see very clearly where value is and where value was at different times.
For example in 2005 the value line was just below the 1200 level. In 2006 it was about 1270 – you can see that very clearly.
The point is I have been following these charts, looking at these charts for many, many years and it is my contention, my discovery, that these value lines actually relate to each other.
There’s a relationship between the levels where these value lines emerge on the chart.
I’m not going to say any more about that in this video but currently where the SP500 is finding value, as far as I’m concerned at least, is very, very bearish.
It is not suggesting that the bear market finished at the March low. It is in fact suggesting that the March low is not low enough. Actually a move below 500 is what this chart is suggesting and that’s obviously a very bearish picture indeed.
So again, why the meltdown scenario? If the market is eventually going to go below 500 why shouldn’t it take all the time it wants to get there? Why not a low below 500 in say three years time?
The next chart shows what I believe is W.D. Gann’s Master Time Factor and again you should Google “W.D. Gann” for more information. I believe that Gann’s Master Time Factor is the 60 year cycle. And that’s what we’re looking at here.
The blue line shows the Dow from 1947 through 1949 and the brown line shows the Dow from 2007 to present. They are not identical I’ll grant you but to me they are very similar and I’ll tell you why. Look in the middle here at the “8” year.
Now a year ending in “8”, as any Gann analyst will tell you, is typically a strong year. Gann said this himself in the early part of the last century. If you look at charts of 1958, 1968, 78, 88, 98 you’ll see that typically they are strong years – but not 1948, it was unusually flat; and certainly not 2008 and that’s because I believe the sixty year cycle happens to be active.
I look at this chart and to me it strongly suggests a final low is yet to come and pretty quickly. By the way, in 1949, the low here was the ultimate low. The dow never went any lower than that.
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