2009 Stock Market Forecast

The closest precedents for the action of the market averages since the 2002 low points are the 1932-1942 and the 1982-1990 market cycles. In each case the market advanced for five years from the low of a severe bear market. The subsequent bull market tops occurred in March of 1937 and in August of 1987. These tops would correspond to the October 2007 top in the current cycle.

From the 1937 top the Dow industrials dropped for 12months and by nearly 50% to a low in March of 1938. From the August 1987 top the Dow dropped 40% to a low in October 1987. While this latter bear market lasted only 2 months the Dow traded sideways for nearly a year afterward before beginning its a new bull market which carried it to a top in July of 1990.

These two precedents offer evidence that the low we saw at 7,392 in the Dow on November 21, 2008 ended the drop from the October 2007 top at 14,279.

Looking ahead using these precedents as a guide we would expect a relatively weak bull market during 2009. In the case of the March 1938 low at 98 the Dow rallied to a pair of tops at 158 in November of 1939 and 155 in October of 1939, an advance of roughly 60% from its 1938 low. From its low of 1,615 on October 20, 1987 the Dow rallied to 3,024 in July of 1990, an advance of 87%.

On this basis the minimal expectation would be for a move up to 11,800 with a pair of tops near that level in July of 2009 and June of 2010. The 1987-90 precedent implies a stronger bull market. We find that 35 months elapsed between the 1987 and 1990 tops. This would suggest a bull market top in September of 2010 at the 13,800 level.

Let's continue this projection through the subsequent bear market. The end of the bear cycle that started from the March 1937 top at 195 occurred at the 92 level in April of 1942. This suggests that after a top in June of 2010 the Dow will drop again to a lower low at roughly 6750 in November of 2012. On the other hand the 1982-1990 market cycle suggests a more bullish outcome. It predicts a drop of only 20% or so from the September 2010 top at 13800, a drop that would carry the Dow down to 11,000 by late 2010. Both precedents predict that a very strong and extended bull market lasting between four and eight years will start after the low point projected for either late 2010 or for 2012.

Lindsay's Long Sequence

George Lindsay used a 20 year cycle in stock prices which he called The Long Sequence. The first such sequence he studied began at a bear market low point in 1798. The last long sequence Lindsay had identified before his death in 1985 started from the 1970 bear market low. I believe this long sequence ended at the 1990 low at which point the current long sequence began. I think the current long sequence will end at a bear market low sometime during the 2010-12 time frame.

According to Lindsay a Long Sequence is a pattern of bull and bear markets lasting about 20 years, give or take 2 years. The first part of the long sequence traces out a generally advancing pattern. This advancing phase typically lasts 15 years but can stretch longer if one or more long Sideways Movements (a relatively narrow trading range lasting at least 9 months) occurs during this advancing phase. I believe the top of the current Long Sequence occurred in October 2007, 17 years after its start in October 1990. During this time the Dow exhibited not one but two very unusual Sideways Movements. The first lasted from May 1999 through May 2001, an interval of 24 months. The second started in February 2004 and ended in October 2005, an interval of 20 months. These two Sideways Movements are more than enough to account for the extension of the upward phase from its typical length of 15 years to the 17 year advance seen from 1990 to 2007.

From the top of the Long Sequence the market averages typically drop for 3 to 5 years. This period typically involves two separate bear markets separated by a weak bull market. Usually the second bear market establishes the low of the Long Sequence, but in three instances the first bear market established the Long Sequence low while the second bear market made a higher low. This happened for the Long Sequence which ended in 1990. The 1987 top ended a 17 year advancing phase of this sequence which had started from the 1970 low. There followed two bear markets, the 1987 crash and the 20%, 1990 drop which anticipated the first Gulf war.

Since I think the top of the current Long Sequence occurred in October 2007 I expect the downward phase to last 3 to 5 years. It should consist of two distinct bear markets and end at a bear market low in late 2010 or late 2012. The first of these two bear markets ended in November 2008. A weak bull market should now develop as suggested by the 1932-1942 and 1982-1990 precedents discussed earlier in this forecast. I have no firm opinion about whether or not the bear market which should start in 2010 will carry the market below its 2008 low.

Three Peaks and a Domed House

Despite its length the 2002-2007 advance did not contain any major examples of Lindsay's Three Peaks and a Domed House formation. One interesting aspect of Lindsay's Long Sequence theory is that it predicts that such a formation will encompass the weak bull market which separates the two bear market declines during the declining phase of the Long Sequence.

Thus we should expect to see a major Three Peaks and a Domed House formation start to develop soon. The Domed House advance should take up the best part of 2010 and end the bull market which started from the November 2008 lows.

Basic Advances and Declines

While Lindsay viewed his theory of basic advances and declines as his fundamental market tool I found this theory very difficult to apply during the 2002-2007 market advance. In retrospect I paid insufficient attention to the action of the Dow Industrials during the bull market. I prefer to use the S&P 500 as my principal market indicator because it is a more broadly based measure of the market and because it is my principal trading vehicle. Nonetheless, the picture of basic advances in declines in the Dow is crystal clear while the corresponding analysis for the S&P remains murky even now.

The first basic advance in the Dow was a subnormal one and lasted from July 2002 to February 2004. There ensued a long sideways movement lasting 20 months. After this sideways movement ended the market started a second basic advance of normal length of 24 months which ended at the October 2007 top. In his discussion of basic advances and declines Lindsay addresses the question of when one should be on the lookout for a repeat of the 1929 crash. His answer: watch for a sideways movement lasting at least 11 months; if a basic advance begins from this sideways movement, a crash will start once the basic advance has ended. My failure to identify the 2004-2005 sideways movement in the Dow meant that, while I was well aware of Lindsay's analysis of this situation, the subsequent crash caught me by surprise.

The drop from the October 2007 high to the November 2008 low is a completed basic decline, both in the Dow and the S&P 500. A basic advance is now underway. Normally a basic advance lasts about 2 years. This implies a top sometime in 2010, a prediction consistent with our previous analysis.

Lindsay's Long Time Periods of 12 and 15 Years

Another pair of George Lindsay's tools is the Long Time Periods of 15 years and 3 months from important lows to important highs and of 12 years and 10 months from important highs to important lows. The 15 year period may stretch to 16 or even 17 years if one or more Sideways Movements develop along the way.

The Long Period of 15 years from the 1990 low extended to 17 years because of the two very long Sideways Movements in the Dow which started in 1999 and again in 2004 as pointed out perviously in this forecast. This period ended at the October 2007 top. A second 15 year interval started from the March 1994 low and ideally will end at an important top in June of 2009. Again, this period encompasses two very long Sideways Movements and so it would be normal for it to exend for at least another year into 2010.

There are two 12 year periods currently operating. The first started from the July 1998 top and is scheduled to end at a low in May of 2011. The second 12 year period began at the March 2000 top and should end at a low in January 2013. Both projections are consistent with a bear market that should start in 2010 and end sometime during the 2011-12 period.

Counts from the Middle Section

Linday prized his Counts from the Middle Section above all his other tools. He said that it was responsible for his amazing record of successful forecasts from 1955 through 1970.

A Middle Section is ideally a period of time during a bull market advance during which the Dow actually drops in a reaction or during which the average advances more slowly than before while experiencing at least two obvious corrections. The latter type of Middle Section Lindsay called an Ascending Middle Section, while he called the former a Descending Middle Section.

The first chart you see above is a schematic of an Ascending Middle Section. I believe that an Ascending Middle Section developed in the Dow Industrials in the middle of the basic advance which started in October 2005 and ended in October 2007. But it was very difficult to recognize at the time because the market's pace did not slow down at all in the course of this middle section. You can see this on the second chart which is a weekly bar chart of the Dow industrials from 2002 through the present. On it I have marked not only the ascending Middle Section but also the long Sideways Movement, the subsequent Basic Advance, and the Basic Decline which encompassed the subsequent bear market.

Linday's basic rule for projecting tops and bottoms from the Middle Section worked as follows. First identify point E. I think point E occured on August18, 2006. The next step is to measure in calendar days the time from point E to the end of the bull market, point J. In the Dow this occurred on October 10, 2007, a span of 419 days from point E. The first time measurement rule then predicts that a bear market low, the second point A in the schematic, will occur as many days after point J as point E occurred before point J.

In the present instance the November 21, 2008 low occurred 409 days after the October 10, 2007, and error of 10 calendar days.

The second measurement rule says that the next bull market top, the second point J in the schematic should occur as many days after the second point A as point E occurred before the second point A. In this case the second measurement predicts a bull market top for February 27, 2011, 828 calendar days after the second point A on November 21, 2008. This then predicts that the current bull market will last longer than average. However I should point out that point J can sometime be the end of a Sideways Movement which occurs after the actuall bull market top but before the development of a substantial bear market decline.

Summary

The November 21 low marked the end of the 2007-08 bear market. A bull market advance is underway and will probably end at a top below the 2007 high sometime in 2010. The top in the Dow should occur between 11,800 and 13,800. It is likely that most of this bull market will take the form of a Lindsay Three Peaks and a Domed House formation. There is a 50-50 chance that the bear market scheduled to begin in 2010 will carry to a low below the 2008 low. The worst case scenario for the Dow is a low in 2012 at roughly the 6,750 level. However there is an equal chance that the expected 2012 low will develop above the 7,392 low of November 2008.