"Think of yourself standing on the corner of a high building in a hurricane with a bag of feathers. Throw the feathers in the air. You don't know how high they will go. You don't know how far they will go. Above all, you don't know how long they will stay up. Yet you know one thing with absolute certainty: eventually on some unknown flight path, at an unknown time, at an unknown location, the feathers will hit the ground, absolutely, guaranteed. These are situations where you absolutely know the outcome of a long-term interval, though you absolutely cannot know the short-term periods in between. That is almost perfectly analogous to the stock market."

However, in spite of the false breaks, the bullish sentiment, false recoveries and claims of new bull markets, the Dow theory prevailed and the decline into the Phase II low carried the market down some 36% over a 17 month period. This Phase II decline is marked in yellow on the chart above.

Then came the rally separating Phase II from Phase III of this ongoing secular bull market. This rally carried the market up 66% over a 32 month period. This advance is also marked in green on the chart above. Once again, the world was convinced that the bear market was over. After all, the market had made a new high. How in the world could we still be in a bear market with the market at new highs? Those Dow theorist’s had to be wrong this time around because this time was different and it was “obvious” with the market at a new all time high.

October 16, 2005

Rally Days are a Normal Part of Multi-Week Stock Market Crashes
by Robert McHugh

This week we want to explore the incidences of rally days inside market crashes. Have past crashes entertained rally days? Significant rally days? Or do the presence of rally days by their very nature cancel out the crash threat? The following chart is a summary of the panic selling events since the Bear began on January 14, 2000:



During Crash # 1, which began at the all-time top for the Dow Industrials on January 14th, 2000 and ended 36 trading days later on March 8th, 2000, there were 15 rally days (41 percent), of which five were huge - over 100 points. Day 10 saw a 201 point rally, day 11 saw another 100 point rally, day 20 tacked on 198 points, day 29 saw a 176 point rebound, and day 33 rose 202 points. Yet in spite of these attempts by the market to end the crash, the Dow fell 2,296.75 points, or 19.2 percent over 36 days. And yes, we had the presence of a Hindenburg Omen.

During Crash # 2, which started on 9/6/00 at 11,518.83, and lasted 30 trading days, and fell to 9,571.40 on 10/18/00, we saw 8 rally days, 25 percent of the days, totaling 573.07 points, including one day that rallied a huge 195.7 points. What trickery! Further, at one point inside the crash, the DJIA rallied four out of five days. This crash ended up dropping the DJIA 1,947.43 points, or 16.9 percent. And yes, there was a Hindenburg Omen present.

During Crash # 3, which started on 3/8/01 and lasted 10 trading days, there were 3 days the market rallied (30% of the time) and 7 the market declined. Rallies were day three (82 points), day five (58 points) and day seven (136 points). The other seven days lost a total of 2,169 points. The Dow fell 1,893 points, or 17.3 percent. Yes, it had a Hindenburg Omen.

Crash # 4 started on 8/27/01 and lasted 14 trading days. Inside that crash period, there were 3 days the market rallied (21%), days four, five, and six. Over these 3 days, the market rallied 114 points. Over the twelve declining days, the market fell 2,685 points. This crash included 9/11, and saw the DJIA fall from 10,498.03 to 7,926.93 on 9/21/01, a 2,571.10 point, 24.5 percent plunge. Yes, it had a Hindenburg Omen.

Crash # 5 began on 5/17/02 and lasted 46 trading days. During this lengthy crash period, there were 13 rally days (28%) interspersed evenly throughout. Some of these rally days were huge, up 213 points on day 20, up 325 points on day 33, with five days rallying over 100 points each. The decline from 5/17/02's 10,400.62 to 7/24/02's 7,489.53 took the Dow Industrials down 2,911 points, or 28 percent. Yes, there was a Hindenburg Omen present.

Crash # 6 began on 8/23/02, lasting 33 trading days and had eleven (33%) rally days. One of them, day # 26, rose a whopping 347 points. Five rose over 100 points. The DJIA fell 1,870 points, or 20.6 percent into its 10/10/02, 7,181.47 low. Yes, there was a Hindenburg Omen on the meter.

Crash # 7 began on January 13, 2003 and lasted 38 trading days. Inside this severe decline were 13 rally days (34%). Four of these rallies were 100 points or more. This event shaved 1,498 points off the DJIA, or 16.8 percent, to 3/12/03's 7,397.31.

The point here is that markets get oversold - even in crashes - and rally days are necessary to work off oversold conditions to sustain the downside momentum.

We currently have five Hindenburg Omens on the meter from September 2005, and thus remain in dangerous waters, regardless of what rallies occur over the next week or two...