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Special Edition Cup of Jo: 100-Year Market Theory


At any given point the market exhibits numerous phases/trends simultaneously that leaves multiple interpretations depending on the timeframe.


Today's Special Report is quite lengthy and I recommend having some serious focus time for it, as mentioned in this week's Cup of Jo. Hence, you may want to print it out, put it in your briefcase and take it home to read over the weekend.

Following the recent ascent of the Dow Jones Industrial Average (DJIA) above the latest secular consolidation, which dates back to January of 2000, I have received many inquiries about my firm's 100-Year Market Theory and the corresponding Dow Chart. As such I feel it is an appropriate time to pen this update and release my firm's "New" 100-Year Dow Chart reflecting updated data through 2006.

  • Readers unfamiliar with Tuttle Asset Management, LLC's (TAM's) 100-Year Market Theory may want to examine the original document to gain a greater understanding of the original theory.

In the original analysis my firm stated that the U.S. equity market – represented by the DJIA – has gone through eight secular (long-term macro) phases since the beginning of the 20th century (including three bulls, four consolidations, one bear). Since the market has gone above the secular consolidation, the questions currently being asked are, "Has the consolidation phase come to an end?" and "Is the market beginning a new secular bull phase?" The intent of this document is to assist in answering those very questions.

The first step in determining such a change is to define the conditions which must transpire to conclude its actual occurrence. Throughout the course of this document I broke down my analysis into smaller sub-trends/phases (cyclical and secondary) to identify the components of the larger secular trend/phase.

Once comprehending the concept of diminishing timeframes and associated trends within trends, it becomes much easier to ascertain where the market is in relation to a greater trend. This technical methodology assists in defining and identifying the beginning/ending of each phase. Accordingly, by defining when, where and what causes the end or continuation of a smaller trend, one can establish if the next larger and subsequent trend will continue or change to an alternate phase.

At any given point the market exhibits numerous phases/trends simultaneously that leaves multiple interpretations depending on the timeframe. Not unlike the three phases/trends to describe secular markets (bull, bear and consolidation), there are also cyclical (primary) trends within the broader secular phase identically defined. This analysis can be isolated further to the lowest level and even applied to a day-trader looking at minute charts. The four main classifications are:

  • Secular Trend:
    • Viewed generally in monthly logarithmic charts
    • Consists of two or more cyclical trends
    • Typically last five to twenty years
  • Cyclical Trend:
    • Also referred to as "primary"
    • Viewed generally in weekly charts
    • A smaller trend within the secular trend
    • Typically last one to six years
  • Secondary Trend:
    • Deemed "corrective" or "counter cyclical"
    • Viewed generally using daily charts
    • Usually defined as cyclical bull corrections or cyclical bear rallies
    • Typically last from one month to one year
  • Minor Trend:
    • Also referred to as "counter corrective"
    • Viewed primarily using daily and occasionally hourly charts
    • Very short-term moves traditionally insignificant to investors and mainly used by traders
    • Typically last only days or weeks

If this seems confusing please refer to an excerpt from the original Theory…

"It is important not to get caught up in the semantics of defining bull & bear markets – but rather to focus on pre-defined trend analysis and where the market stands from a technical perspective. The interpretations are at the hand of the individual and can be determined by how and when the markets move in and out of its phases starting from the shortest term trends through the longest."

The methodology becomes clearer via a graphical illustration. Figure I is a one year daily chart of the SPX which begins with a secondary correction in September of 2005. By October the market bounced off the longer term cyclical bull trend (black) and broke upward through the secondary correction (red).

From there it successfully re-tested the break and changed into a secondary bull (blue) that lasted until May of 2006. Here the secondary trend changed again by breaking the uptrend and successfully re-testing (even if for only one day). This time the cyclical trend was tested twice before breaking back above the secondary bear. After yet another successful re-test the market provided a second confirmation when it broke above the resistance from the last peak.

Figure I

Two secondary corrections took place within the example and yet the market, in both instances, held its cyclical bull trend. Hence, the larger trend retained precedence. However, if either of the secondary corrections did have enough power to bust below the cyclical bull trend, I would have then looked for a confirmation consisting of a larger re-test and continuation downward on a grander scale.

Again, by understanding the lesser one can gain an unambiguous comprehension of the dynamics which alter the greater. My firm's analysis is similar in that it incorporates changes in both the cyclical and secular trends. Ascertaining a secular change from consolidation to bullish is fairly intense and requires a more thorough examination because such shifts are actually continuations onward, instead of directional changes.

Confirmations, evident in all the historic secular transitions from consolidation to bull, are partially from a continuation of the cyclical bull above and beyond the secular consolidation resistance (SCR). From there the market traditionally shifts into a secondary corrective bear phase, successfully re-tests the secular consolidation breakout, ends the secondary correction and continues its upward journey.

As noted in the first rendition of the Theory, there have been numerous times where the market has surpassed the topside of the long-term channel only to disappoint. This is precisely why I place great importance on bottom-up analysis and a specific sequence of events required to determine an indisputable change. Analyzing the first three secular consolidations provides a foundation for the essential guidelines.

The First Secular Consolidation:

The first secular consolidation from 1906-1924 is shown in a weekly chart (Figure II). The consolidation phase depicted below outlines and separates all the smaller cyclical cycles within. Each shaded area portrays both the length and depth of each cyclical bear, bull and consolidation period. This particular nineteen year affair consisted of eleven cyclical trends (five bears, five bulls and one consolidation). What should be noted are the three attempts the market made to cross above the consolidation resistance level which all ended poorly for investors (Points A, B, and C, Figure II). The focus of our work is distinguishing the A, B and C attempts from the 1924 success.

Figure II

Outlined in Figure III is a one year daily graph illustrating the end of the third cyclical bull phase (Point A from Figure II). This happened ten years into the secular consolidation and depicts the first attempt at the 100 SCR level, succeeding breakout and utter failure.

Figure III

In December of 1915 the DJIA made its first attempt at breaking the secular consolidation resistance (SCR) since late 1909 and began a secondary correction that lasted almost seven months. The correction bottomed in July of 1916 when it bounced off the larger cyclical bull trend. This resulted in an August break upward from the secondary downtrend (red) and a September successful re-test which changed the secondary phase from bear to bull and sent the market on a straight "beeline" for the SCR.

On September 22, 1916 it broke-out on 2.5 times Average Daily Volume (ADV). By mid-October it successfully re-tested the breakout and continued upward to the tune of 10% above the SCR. Two months after (November 21, 1916) the market topped and broke back through the secondary bull trend (blue) and re-tested the SCR breakout for a second time in December. This, from a macro standpoint, was not yet technically concerning.

However, within the next few days the market dropped back below the SCR on massive volume which also corresponded to a break of the two year cyclical bull trend. This began a new cyclical bear phase with a January confirming re-test. Thirteen months from the peak (Dec. 19, 1917) the market bottomed at 66, corresponding to a 40% drop in value.

One conclusion drawn from this is that by solely using a 'cross above resistance' indicator to determine a change of phase will most likely create false positives. In very similar fashion, points B and C from the secular consolidation chart above (Figure II) have similar technical underpinnings.

  • Point B (the 1919 top) actually re-tested the SCR breakout twice and lasted just over five months until it peaked 19% above. When breaking back below the SCR and cyclical bull trend the resulting change of phase lasted twenty one months from the top and crumbled an astonishing 46%.

  • Point C (the 1923 top) was similar in nature but not as devastating. The market attempted to breakout twice at the end of 1922 on a much smaller scale. Once consolidating it retried in January of 1923. This episode only lasted two months before dropping back below the SCR and creating a 1 ½ –year cyclical consolidation.

Understanding past failures is only half the equation; we must also examine the victories. Figure IV illustrates, again with a daily chart, the successful breakout from the approximate nineteen year secular consolidation. When compared to the prior failure, the beginning technical events are similar in nature. It is only after the first top, preceding the SCR breakout, that its success becomes apparent.

On July 28, 1924 the market surpassed the SCR on 1.75 times ADV and by Aug. 20, 1924 increased an additional 5%. The resulting peak changed the secondary phase from bull to bear. Similar to its predecessors it re-tested the SCR breakout, but this time it toed the line, broke back above the secondary bear downtrend and followed through by breaking the secondary bear top with a continuation/confirmation breakout. From the re-test on Oct. 14, 1924 the market was off to the races in a new secular bull which ended on Sep. 3, 1929 at 386 – a 286% increase.

Figure IV

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