Commentary for November 8, 2004

According to Dow Theory there is something called the primary trend, which corresponds to the more commonly referenced secular trend in stocks on a very long-term basis. Basically, the primary trend is the powerful, underlying current the dictates long-term price movements, and we believe that every investment portfolio should be aligned with the current investment climate as defined by the type of primary trend.

Now, many financial analysts will tell you that it’s impossible to time the market or even go so far as to tell you that bull and bear markets don’t even exist! However, anyone who provides such advice is either ignorant of market history and mechanics or doesn’t want you to know about it for whatever reason. They say buy-and-hold always works over long periods of time, but the critical caveat that they usually fail to mention is that you have to buy at the right time and hold only until a subsequent right time. Not only does the primary trend exist, but it is–for the most part–readily identifiable.

Here at PMI we have created a software program that calculates a secular score. The program analyzes things such as market multiples, dividends, volume, breadth, sentiment, everything that we believe provides information regarding the current state of the secular trend. Then, it calculates a score that ranges from -100 to 100, where -100 indicates the terminal phase of a secular bull market and 100 indicates the terminal phase of a secular bear market; in other words, -100 means get out of stocks, while 100 means load-up on them. We’ve spent years refining this software, back testing all the way to the great bear market of the 1930s, and it has proven to be high reliable: it has correctly identified the beginning and end of every secular trend over the past 75 years.

So not only does the primary trend exist, but it can be readily identified by anyone with the time and inclination to do so, making it possible to properly align an investment portfolio with it. Currently, our secular score is a decidedly bearish -67.6. What that means in the context of an early stage secular bear market is this is not the time to be in stocks. From a strictly valuation standpoint, with a P/E ratio of over 20.7 on the S&P 500 and an average dividend of only 1.7%, the extreme risk in this market climate is fairly obvious. However, market sentiment is extremely bullish, with over 57% of newsletter writers reported as bullish and only 23% as bearish. The point is this market is extremely vulnerable to the renewal of the secular bear trend, which is almost certainly still in its initial stages.

Category: Commentary, Market Update