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An Analysis of the Cyclical Bull Markets Within the 1929 to 1949 Secular Bear Market

(July 16, 2006)

Dear Subscribers and Readers,

Before I introduce our guest commentator, David Korn, I want to take some time out and put in my two cents with regards to the state of the U.S. stock market.  As this author mentioned in a real-time, subscriber-only email last Friday, our 100% long position in our DJIA Timing System that we established on June 8th (50% at 10,810) and June 12th (final 50% at 10,800) was stopped out at our average entry point at a DJIA print of 10,805.  This stop point was hit last Friday morning, and thus we have now exited our 100% long position and are now completely neutral in our DJIA Timing System.

At this point, this author is looking for a way to get back into the market on the long side – as I believe we are now entering a quick “capitulation phase” in the stock market due to the violence that is currently going on in the Middle East.  At this point, no one knows whether the current violence will further escalate into a wider conflict but one thing is for sure: Both the U.S. dollar and the U.S. long bond have enjoyed substantial rallies since the beginning of July and the escalation of the violence – meaning that the U.S. is again being regarded as a safe haven (especially so since holding U.S. dollars is currently more profitable with the interest rate differential).  After the conflict subsides (and hopefully it will soon), wealthy Middle Eastern citizens will again become more risk-adverse to investing in their local markets – which means that U.S. assets (especially domestic, U.S. large caps such as WMT, HD, EBAY, INTC, MSFT, YHOO, UNH, etc.) will once again appear attractive to Middle Eastern investors.  On the other hand, I continue to believe that holding the U.S. long bond is a no-lose proposition – especially since I believe the Fed is probably going to hold on rates at the August 8th meeting (case in point: the ECRI Future Inflation Gauge has been benign for four months in a row – and for the first time in a long time, GaveKal's diffusion index of the CPI has turned down).

Bottom line: I believe the U.S. stock market will give us a substantial low to go long within the next couple of weeks.  Now that I have stated my timeframe, I bet readers now want me to go on record and state what my targets are on the major indices.  To tell you the truth, I don't really know – and neither does anyone else.  But chances are that this decline won't evolve into an all-out crash, given the following:

  • Quarterly contributions for calendar-year defined benefits pension plans were due on Friday.  And this cash should be immediately put to work in the stock market on Monday morning.

  • The Barnes Index has plunged significantly with the recent roll-in of the latest earnings reports.  The latest reading of 50.00 is a decline of a whopping 11.60 points from last Wednesday at the close.  Also, with a recent high Barnes reading of 67 or so on May 9th, this reading did not get into a very overvalued zone (anything over 75) relative to the readings we have seen over the last 35 years.  In other words, the rubber band didn't get stretched too far on the upside to cause a crash once the uptrend reverses.

  • The latest spike in oil prices have mostly been caused geopolitical issues – and chances are that Ben Bernanke will take this fully into account at the next Fed meeting on August 8th.  This author believes that chances are now that the Fed will not raise again on August 8th.  This should cause an immediate rally in stock prices.  Moreover, the Iranian Treasury itself is suffering from the effects of high gasoline prices – and at the current price and rate of consumption of the Iranian people (whose fuel consumption the government is subsidizing), the funds that the Iranian government receive from exporting its oil will be exhausted.  The consequences will be dire – either the Iranian government will have to cut the subsidies or start rationing gasoline – neither of which will sit well with the Iranian people.  Bottom line: Iran does not have an “oil weapon” to fool around with and it is actually in its best interest to make sure both oil exports and gasoline imports are flowing freely to and from the country.

  • Share buybacks and cash acquisitions by companies and private equity investors have been on a record tear recently – even up to as recently as last Friday morning with the announced $1.7 billion buyout of Petco (see the following St. Paul Pioneer Press article for more details on company buybacks).

Now, onto David's guest commentary!

For readers who have been with us for awhile, you may recall that - while nothing is for certain - I had contended in many of our commentaries that we may now be in a secular bear market in stocks that is very similar in nature to the 1966 to 1974 secular bear market.  If so, then we may be in for more of a trendless but volatile market ahead - where stock-picking will get infinitely more difficult and where many individual investors (and hedge funds) will ultimately be driven out of the stock market.  That being said, there were also two significant, cyclical bull markets within that 1966 to 1974 secular bear - during the periods from October 1966 to December 1968 and from May 1970 to January 1973 - where nimble investors or traders could have made a significant amount of money.

I have spoken about these cyclical bull markets on an "on-and-off" basis in our commentaries.  But David Korn, of, has taken this a step further and has written an analysis that is intended to chronicle the major market movements during that fateful period.  In doing so, he has also extended his definition of the secular bear market from the period 1966 to 1974 to 1966 to 1982.  You can read his original analysis of the cyclical bull markets within the 1966 to 1982 secular bear market in his January 5, 2006 guest commentary.  Today, I bring to you his analysis of another secular bear market but one earlier in the 20th century – that of the cyclical bull markets within the September 1929 to June 1949 secular bear market.  Ultimately, it does not matter too much how you label the secular bear market - that period of time in both market history and U.S. history was just plain brutal.  Here's hoping none of you will need to experience anything like this again - but if we do, then knowing what happened in the past will help you immensely with how to navigate the treacherous waters that may be up ahead.

David's newsletter is focused on personal finance, stock market timing, and independent stock market analysis. He also provides a summary and interpretation of the radio show Moneytalk, hosted by Bob Brinker; his newsletter has been published for nearly five years and has a very good investment track record, especially over the last few years.  This is his third commentary for  His very first guest commentary, "The Six-Month Market Timing Strategy" was published on May 8, 2005.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service.  Copyright 2005 David Korn, L.L.C.



When looking for some perspective on corrections within cyclical bull markets, we have some history in the U.S. stock market to look to for guidance.  Although history is just a starting point, market patterns tend to repeat themselves over time.  The reason why I think they do is that the market participants are humans and humans base many of their investment decisions on the same emotions that people always have since investing began.  More importantly, extreme emotions, such as greed and fear, tend to dominate the market action and cause exaggerations both on the upside (i.e. 2000) and the downside (October 2002).  For those reasons, I find the study of past bull and bear markets invaluable.


I believe that we are currently in a cyclical (short-term) bull market that is occurring within the context of a secular (long-term) bear market.  I believe the secular bear market that we are currently in began in the first quarter of 2000 when we completed one of the greatest secular bull markets of all time which brought the S&P 500 Index to its closing high of 1527.46 on March 24, 2000.  The Nasdaq Composite reached its all-time high two weeks earlier on March 10, 2000, when it closed at 5048.62.  I believe this secular bear market will witness a contraction of price-to-earnings multiples which, over a long period of time, will bring P/E multiples back in line with the historical mean.


Subscribers who have been with me a long time have seen my analysis of the four cyclical bull markets that occurred during the last secular bear market which took place from 1966-1982.  (If you would like a copy of my newsletter that has the complete 1966-1982 cyclical bull market analysis, just let me know).

The cyclical bull markets that occurred during that time frame, all had one thing in common.  The largest corrections come in the range of 10%-16%.  If we do get a correction along the lines of a 10-16% magnitude, how would that translate into a price for the S&P 500?  As measured from the bull market highs which were recorded on May 5, 2006 at 1,325.76, here is how it would look:

A 10% Correction in the S&P 500 would bring it down to 1,193.19.

A 16% Correction in the S&P 500 would bring it down to 1,113.64.

Now, absent the big kind of corrections of 10-16%, the rest of the corrections that occurred during the 1966-1982 time frame typically capped out in the 4%-7% range which is where we are right now.  If we have the same magnitude of correction that occurred in 2004 of 8.2% in the S&P 500, that would bring us to a level of 1,217.05.  A 9% correction would bring us to 1,205.45.  If you are into round numbers (and many timers, traders, TA type are), then 1200 in the S&P falls right between a 9% and 10% correction.  Just something to consider.  


With my analysis of all the cyclical bull markets that occurred during the 1966-1982 secular bear market complete, I have turned my attention to completing the cyclical bull markets that occurred during the prior secular bear market.   I have completed the first three cyclical bull markets, and today we take on the fourth.

Before you read further, it is necessary to take a moment and orient yourself.  We are stepping back in time to see how the market reacted in the most brutal secular bear market of the 20th century which lasted from 1929-1949.  I suggest turning the lights dim, perhaps holding a penny and thinking you are Somewhere in Time.  

SECULAR BEAR MARKET (September 1929 - June 1949)


Its been a while since my last analysis, so let's take a minute and reflect on what the stock market was doing about 75 years ago.  We were in the roaring 20s and the stock market had gained 497% over an 8-year time frame.  The Dow had risen from 63.90 on August 24, 1922, to 381.19 on September 3, 1929.  People were as excited about stocks as they were back in the bubblicious days of 1999.

Cyclical Bear Market Number 1

And then along came Mary.   A vicious bear market began.  It was downright ugly as investors witnessed record one-day losses of 13% on Black Monday, October 28, 1929, and another 12% loss on Black Tuesday, October 29, 1929.  About two weeks later, the market bottomed (although not its ultimate bottom for this secular bear market).  On November 13, 1929, the Dow closed at 198.69.

Investors were despondent.  Their portfolios had been wiped in half in just over two months.  Things looked bleak, and investors were running scared.  Imagine how it was back in October of 2002, or even March 2003 as investors had suffered through the aftermath of the Internet/stock market bubble.  We were headed into war with Iraq, the fear of further terrorist attacks was ever present, and the economy was suspect.  Quite simply, the stock market was considered a very unsafe place to be invested, just as it was at the end of 1929.     

Cyclical Bull Market Number 1

Ok, we are back in November 1929, and the first cyclical bull market began on November 13, 1929, with the Dow trading at 198.69.  This bull market lasted about five months before reaching its cyclical bull market closing high on April 17, 1930, when the Dow closed at 294.07.  All in all, the Dow gained 48% during this cyclical bull market.  Investors were feeling good again.  Consider how investors were feeling in January of 2005.  The market had gained just about 50% from its bear market lows.  Unfortunately, back in 1930, things took a dramatic turn for the worse.

Cyclical Bear Market Number 2.

After peaking on April 17, 1930 at Dow 294.07, the market took a nose dive.  In just over two months, the Dow had declined almost 23% and closed at 211.84 on June 24, 1930.  Investors got a head fake over the next few months, as the Dow rose about 15% to 245.09 on September 10, 1930.  But the gains were short lived as the Dow crumbled to 121.70 on June 2, 1931.  One month later, the Dow went up to 155.26 (a gain of 27%), but it happened in 30 days, and was really just a temporary spike.  The market immediately resumed its bear market ways for another year, among what might well be the worse bear market our country will ever see again.  The carnage ended at Dow 41.22 on July 8, 1932.

Did you catch that?  From April 17, 1930 when the first cyclical bull market ended at Dow 294, to July 8, 1932 the Dow declined 86% over a 3-year and 3 month time frame!  

(Incidentally, I will be doing my analysis of cyclical bear markets in future newsletters once I finish the analysis of all the cyclical bull markets).

Cyclical Bull Market Number 2

The Dow began the second cyclical bull market of the 1929-1949 secular bear market at a price level of 41.22.  Hard to imagine now with the Dow above 10,000.   Investors were totally beaten down from the last bear market.  Investing in the stock market was probably the last thing on many investors minds.  Of course, hindsight is 20/20, but when nobody wants stocks, that has often been the time to buy them.  Investors who could stomach the action in July 1932 were quickly rewarded,  The Dow began its bull journey with a hefty 68.3% gain in just over a month!  The volatility, however, was extreme and it was commonplace to see corrections during this particular cyclical bull market in the magnitude of 15%, 17%, even 20% over a relatively brief period of time.  Contrast that with what we have seen in terms of corrections since 2003.  The corrections we have been modest, most of them coming in around the 5-8% range.   Trust me, sitting through a double-digit correction is enough to make even the boldest bull sweat bullets.   This bull market lasted until February 5, 1934, when the Dow closed at 110.74, reaching its cyclical bull market closing high.  All in all, this cyclical bull market lasted 19 months.  During that time frame, the Dow gained 168.6%!

Cyclical Bear Market Number 3

Some market historians suggest that the prior cyclical bull market continued for another three years until February, 1937.  However, this ignores the 5 month period between February-July, 1932.  The Dow started that bear at 110.74 on February 5, 1934 and declined to 85.51 by July 26, 1934.  That marked a decline of 22.79%.  I count that as cyclical bear market #3, although obviously these labels are open to interpretation.  

Cyclical Bull Market Number 3

The third cyclical bull market began on July 26, 1934 with the Dow trading at 85.51.  The bull market lasted until the Dow topped out at 194.40 on March 10, 1937.  All in all this cyclical bull market lasted about two years and 8 months.  During that time frame, the Dow gained 127.36%!  This bull market had enormous gains.  During that time, the market had corrections in the following percentages:

Correction #1: 9.2%   
Correction #2: 3.11%
Correction #3: 5.34%
Correction #4: 9.7%
Correction #5: 5.29%
Correction #6: 6.4%
Correction #7: 11.3%
Correction #8: 4.66%.

Notice that there was one correction over 10% during that cyclical bull market.  Also noteworthy is that if you average these 8 corrections together, you would get an average percentage decline of 6.87% which falls right in that medium 4-7% correction level that we say during the cyclical bull markets of the 1966-1982 secular bear market.

Cyclical Bear Market Number 4

Following the Dow's rise to 194.40 on March 10, 1937, a very tough cyclical bear market ensued.  The Dow fell to 98.95 in just over a year when the bear market ended on March 31, 1938.  This marked a decline of 49.1% -- similar to the bear market we had from 2000-2002 in terms of the percentage decline.

So, with the Dow trading at 98.95 on March 31, 1938, we begin our in-depth analysis of...

CYCLICAL BULL MARKET NUMBER 4 (March 31, 1938 to September 12, 1939)

Date: Dow Jones Price (All based on closing numbers)

3/31/1938: 98.95
4/18/1938: 118.99

As the foregoing numbers show, the Dow began the fourth cyclical bull market of the 1929-1949 secular bear market at a price level of 98.95.  The Dow began its bull journey with a very nice 20.25% gain in under a month.  Of course, what goes up...

5/02/1938: 110.09

A couple of weeks later, the Dow had declined just about 9 points.  While 9 points doesn't seem like much, its the percentage decline that counts.  For this correction, the percentage decline was 7.48%.

5/12/1938: 118.55
5/31/1938: 107.74

10 days later after the first correction, the Dow reached the 118 level again, and once again corrected.  This time to 107.74 which marked a 9.12% correction.  That type of market action might have shaken a few of the weak hands out of the market.  In hindsight, that wouldn't have been a good time to sell.

07/25/1938: 144.91

With hardly a pause, the Dow rocketed to 144.91 which represented a 34% gain in just about three months.

09/26/1938: 129.91

Two months later, we got the first double-digit correction of 10.36%.  That is understandable given that it came on the heels of a 34% gain.  Double-digit corrections require nerves of steel to not sell at the bottom.  It turns out that this correction led to the peak of the bull market.

11/09/1938: 158.08

If you had the stomach to stay through the 10.36% decline, you would have seen the Dow gain 21.68% in less than 2 months and reach a new bull market high.  Now here is a caveat.  Some historians (not all) view this as the end of this cyclical bull market because this is the highest level reached on a closing basis before we saw a 20% decline.  For purposes of my analysis, I am using September 12, 1939 as the end date because the Dow got back up to within just a few points of that high about 9 months later.  Its sort of like the March 2003 retest of the October 2002 lows.  It really is a matter of interpretation, so keep that in mind.

11/28/1938: 146.14

From the 158 level in November 1938, the market declined 7.56% - a pretty normal correction.  What followed was a very interesting development.

01/04/1939: 154.85
01/26/1939: 136.42
03/10/1939: 152.28

Notice that after the correction, the market rose 5.9% to "test" the prior highs.   The test failed, and the market declined 11.91% to 136.42.  Again the market rallied to make another attempt at the prior bull market closing and got as high as 152.28 and once again it failed.  Thus, we had an initial high, two retests that failed, and then the plunge came.

04/11/1939: 123.75

The market then declined 18.74% to reach its lowest point during this entire cyclical bull market.  If you measure the decline from the bull market peak of 158.08, then you would have a 21.72% decline which is why some view the 158.08 as the bull market top, and 123.75 as a  bear market bottom.  Let's keep going.

06/09/1939: 140.09
06/29/1939: 130.05

After reaching 123.75, the market gained 13.20% and then suffered a 7.17% correction.  Again, notice the correction percentage falls right around that 7% level.

07/27/1939: 144.51
08/24/1939: 131.33

The market rallied to 144.51, but then had another correction. This one was 9.13%, just shy of double-digits.  From there, we headed into the home stretch.

09/12/1939: 155.92       

On September 12, 1939, the bull market ended with a closing print of 155.92.  This came about 8 months after the bull market had reached its prior peak of 158.08.  A real significant bear market followed which took the Dow down to 92.92 over the next three years which is why I think it makes more sense to view this cyclical bull as lasting from March 31, 1938 to September 12, 1939.


Studying past bull markets, can give you the ability to gain a perspective on how the market moves.  Too often, we are unable to see the forest through the trees; or, we follow so closely, that we only see the trees without being conscious of the forest.
All in all, this cyclical bull market lasted about 1 year and 6 months.  During that time frame, the Dow gained over 57%.  This bull had your typical corrections which parallel what we have seen thus far in our current bull market.  There was also some more significant double-digit corrections which we have not yet seen.  

I hope you enjoyed this analysis.  I intend on completing my analysis of the other cyclical bull markets within this particular secular bear market and will include them in future newsletters.

If you would like to learn how to subscribe to my newsletter, just drop me a line at or visit my web site which will direct you to my e-mail.  I respond to every inquiry personally.  - David Korn

DISCLAIMER:   The information contained in this newsletter is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security.  This newsletter is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice.  Copyright David Korn, L.L.C. 2006.

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