Lindsay Looks at the Dow

The foundation of George Lindsay's stock market timing methods is his theory of Basic Advances and Basic declines. These are periods of time, measured in calendar days, that show up time and again when calculating the duration of bull and bear markets in the US stock market averages. You can read about this in Lindsay's article "Counts from the Middle Section" which is reprinted in the booklet "Selected Articles by the Late George Lindsay", published by Investor's Intelligence in New Rochelle NY 10801, USA.

Here is a monthly chart of the Dow Industrials which shows my best estimate of the terminal points of these basic advances and declines in the Dow over the past 7 years.

The basic low on September 1, 1998 started a subnormal basic advance which lasted 500 days and ended at the Dow's all time high at 11750 on January 14, 2000. The preceeding basic advance ended on August 7, 1997 and was an extended one lasting 987 calendar days. Lindsay's theory was that very long advances are followed by very short ones and vice versa, so that "everything comes out even in the end". The 1998-2000 basic advance was very short as it should have been according to Lindsay's theory.

The 2000-2oo2 bear market in the Dow developed as two long, basic declines in succession. These were separated by a two month rally from April 4 to May 22, 2001.

The second basic decline of the bear market ended on July 24, 2002. According to Lindsay's theory of alternating lengths of advances the basic advance from July 24, 2002 should be long or extended. I estimate that it ended at the March 7, 2005 top, giving it a duration of 957 days.

Where to from here?

As I pointed out in my 2005 stock market forecast there is a Lindsay 15 year, 3 month time period from the October 1990 low which expires in January 2006. At the very least I would expect the market to trend sideways until that period expires. But my analysis of the ongoing Three Peaks and a Domed House Formations says that the bull market top has not yet occurred. This conclusion is supported by another piece of evidence.

Lindsay insisted that basic advances must start once a basic decline has ended. Thus a basic advance had to begin on April 4, 2001. Where did it end? Well, it had to be a long or extended basic advance since the preceeding basic advance ending in 2000 was unusually short. So it had to last more that two years but less than three. My best guess is that it ended on January 8, 2004. This is a duration of 1009 days, 13 days longer than the longest basic advance ever recorded until then.

The subsequent basic decline ended on October 25, 2004, a duration of 291 days making it a subnormal decline. When might the top occur for the basic advance which started on October 25, 2004? If the alternation pattern continues then we should expect another subnormal basic advance. The shortest one on record lasted 14 months and the next longest ones lasted about 16 months each. So the top of the basic advance which started on October 25, 2004 should occur no sooner than late December 2005 and more probably in February or even later in 2006.

So this analysis of the sequence of basic advances and declines which had to start from the April 4, 2001 low also is telling us that the bull market top which will end the move up from the 2002 low in the Dow in 2002 has not yet occurred.

I think the final leg up in the 2000 - ? bull market lies ahead of us.

ADDED ON NOVEMBER 2, 2005: See the update to this post here.