The Implications of a 75-Year Cycle Top 1/24/08

• Dow just broke its 75-year up trend line (see chart to right).

The Implications of a 75-Year Cycle Top – One Year Later

• Dow Jones Industrials declined from 11,921 to 6,463

• Has closed below its 50-month moving average for first time since 1985!

• Has closed below its 200-month moving average for first time since 1975!

Conventional Wisdom of Last 75 Years is No Longer Valid 1/24/08

• There is always a “January Effect” rally.

• SPX declined an unprecedented 16.4% between 12/11/07 and 1/22/08.

Conventional Wisdom of Last 75 Years is No Longer Valid – One Year Later

• SPX Declined 6.6% between 12/11/08 and 1/22/09

• Once again, there is no “January Effect.”

Conventional Wisdom of Last 75 Years is No Longer Valid 1/24/08

• Utilities is a safe haven for money in a bear market.

• Dow Jones Utilities Average declined 13.9% between 1/8/08 and 1/22/08.

Conventional Wisdom of Last 75 Years is No Longer Valid – One Year Later

• Utilities was indeed not a safe haven for money in 2008.

• Dow Jones Utility Average declined 31.7% in 2008!

• It declined 23.4% between 1/6/09 and 3/9/09 alone!

Conventional Wisdom of Last 75 Years is No Longer Valid 1/24/08

• The Far East boom creates endless demand for commodities, making them a hedge against declining stock prices.

• The CCI Index peaked 1/16 and should decline at least 15% this year.

Conventional Wisdom of Last 75 Years is No Longer Valid – One Year Later

• CCI Index peaked 7/3/08 at 615.04 and declined 47.5% to 322.53 on 12/5/08!

• The Far East bust has revealed little demand for commodities, causing them to crash!

Conventional Wisdom of Last 75 Years is No Longer Valid 1/24/08

• Gold moves in the opposite direction to stocks and is therefore a hedge against declining stock prices.

• Gold peaked on 1/14 at 916.10 and declined 7.4% by 1/22.

Conventional Wisdom of Last 75 Years is No Longer Valid – One Year Later

• Gold declined 27.3% between 10/10/08 and 10/24/08 while the SPX declined 12.1%.

• Gold rose 11.8% between 11/21/08 and 1/5/09 while the SPX rose 27.4%.

• Gold declined 10.6% between 2/20/09 and 3/4/09 while the SPX declined 14.3%.

Conventional Wisdom of Last 75 Years is No Longer Valid 1/24/08

• Since International Stocks are typically contra-cyclical to domestic ones, it makes sense to overweight one’s portfolio with them.

• The S&P Euro 350 peaked last October simultaneous with the Dow and then declined 23.2%!

Conventional Wisdom of Last 75 Years is No Longer Valid – One Year Later

• The S&P Euro 350 declined 46.1% in 2008 as the SPX declined 39.4% - certainly was not contra-cyclical!

• It has virtually traded in sync with the SPX since the October 2007 peak.

The Implications of a 75-Year Cycle Top 1/24/08

• A 75-year bull cycle cannot be corrected by a minor bear market – it takes a super bear to correct a super bull.

• During the past 75 years, bear markets averaged 15 months in length, but a super bear will last 36-48 months!

• During the last 75 years, the average bear market decline was 23%.

• We expect this super bear to contain a series of such declines interrupted by several short but sharp rallies of as much as 20%.

• Therefore, we expect volatility to remain at double its formerly normal level.

The Implications of a 75-Year Cycle Top – One Year Later

• We are clearly in a super bear market.• Thus far this super bear has lasted 17 months and

counting!• From high to low, the SPX has declined 57.7%!• So far, we have had three declines of 20.2%,

48.3%, and 29.6%, and two two short, sharp rallies of 20.4% and 26.9%.

• The VIX Index rose 526.3% from 17.01 on 5/19/08 to a record 89.53 on 10/24/08!

How PatternWatch Performed in 2008

• Average Gain of 128 Trades

• 42.94%

• % Profitable: 109/128

• 85.20%

• Average Gain of 110 Stock Trades

• 51.51%

The Implications of a 75-Year Cycle Top – Where We Go From Here – Part 1

• SPX has just closed below its 28-year up trend line, indicating a bearish long-term trend.

• We expect the first half of this super bear market to bottom in late March 2009 at SPX 625 and Dow 6250.

• We then expect the typical mid-bear rally to SPX 950 and Dow 9300 by late June 2009.

• Then we expect the second, and worst, half of the bear to decline to SPX 392 and Dow 3900 by late December 2012.

• Note: Typically the worst economic developments and indicators of the downturn do not occur until the second half of the bear, i.e., late summer/early fall 2009.

The Implications of a 75-Year Cycle Top – Where We Go From Here – Part 2

• Economic Stimulus plan and Fed quantitative easing both fail, leading to runaway deflation in second half of 2009.

• CCI index declines to 175 by year-end 2009.

• Gold declines to under $200/oz by year-end.

My Contact Information

• Steven M. Frenkel, CFA

• Chief Technical Analyst, PatternWatch

• Office: 201-797-3419

• Cell: 201-410-9335

• Fax: 201-797-4241

• Email: frenkly@verizon.net