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Bear Market Rally or New Bull?

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Prepare for the possibility of a big downturn.

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Editor's Note: We'd like to introduce our latest contributor, Ron Coby. At www.cobylamson.com, Ron does free weekly market update videos on the stock, bond, oil, and gold markets, assisting investors in identifying major trend reversals through the use of Coby Lamson's proprietary timing indicator, "The Lamson Grail."


After this recent 68.5% move up in the NASDAQ from the March lows, and a 47.5% rally in the Dow Jones Industrial Average (DJIA), this is the question that's on every investor's mind. To answer it, we must look back in history to crashes comparable to the one we just experienced from the October 2007 highs to the March 2009 lows, a fall of over 50% on DJIA, NASDAQ, and the SP500. Similar periods would be the famous 1929 crash, and the crashes of 1973-74 and 1987.

The Good

In a Clint Eastwood analogy of The Good, The Bad, and The Ugly, there are no "good" crashes, only "good" bull markets that eventually follow. On that hopeful note, let's move on to the bad and the ugly.

The Bad

The 1987 crash with its comparatively modest 36% decline, while not good, was the least bad or ugly of those we'll now look at. It was of such short duration and recovered so quickly that this severe correction isn't nearly as good a "comp" to our present market as "the bad" and "the ugly" crashes of 1929, 2000, and 1974.

When we look at today's powerful 68.5% rally in the NASDAQ, the DJIA of 1974-75 comes to mind. After the DJIA crashed 44.5% between January 11, 73 and October 4, 1974, it rallied a comparable 73.5%. It's possible that our current rally in the NASDAQ could turn out to be greater than the 1975 DJIA rally because the current NASDAQ had a much worse collapse of 55.5%.

In the past, the DJIA was the proxy for "the marketplace." Many believe that today's NASDAQ has assumed that role, and that it's the more accurate representation of today's overall economy. If that's so, when the NASDAQ finally ends its current powerful rally, we may very well see a series of corrections and rallies such as those that took place in the DJIA between 1975 and 1982, when a new secular bull market was born.

Indeed, a strong case can be made that the true high of our markets was put in with NASDAQ 2000 bubble high, and the first of the crash and rally intervals took place beginning with the crash of 2000-02. The roller coaster sequence of 2000-02 crash, 2002-07 rally, 2007-09 crash, and the current rally of 2009, may indeed be the proof that we're in such a period. Six more years of crashes and rallies doesn't bode well for those investors still faithful to the philosophy of "buy and hold."
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No positions in stocks mentioned.
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