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The theory is founded on the premise…

"Excess market valuations, due to extreme price movement upward over extended periods, may take years to work off as earnings catch up with prices."

Before reviewing the long term market philosophy its important to make a few disclosures

• The material presented is not solely technical in nature. The chart incorporates the 10-year smoothes average Price/Earnings ratio of the S&P 500 Index as a broad measure of the market`s fundamentals. Although not without imperfections, in my judgement it`s the only true time tested fundamental metric with long term reliability.
• The Dow Jones Industrial Average prices are in logarithmic form, while the P/E ratios are arithmetic.
• The data is considered to be factual in nature and sources believed to be reliable.
• The presented information is a matter of opinion from Tuttle Asset Management, LLC and should be considered as such

A critical component of any technical study centers on the time frame and context in question. As such we must also define a few key technical terms to help us put the timeframe in the proper perspective.

• Secular Trend: A very long term trend in which the market stays for an extended period of time, typically 5 to 20 years and consists of 2 or more cyclical trends.
• Cyclical (Primary) Trend: A trend, within the secular trend, which in general lasts from 2 to 6 years.
• Secondary Trend: These minor trends are normally defined as corrections in bull markets and rallies in bear markets, typically lasting a few weeks to months.

“It is important not to get caught up in the semantics of defining bull & bear markets – but to rather focus on pre-defined trend analysis and where the market is from a technical perspective. The interpretations are at the hand of the individual and can be determined by how and when the markets move in and out of its phases starting from the shortest term tends through the longest.”

The graph and following table show that over the last 100 years the Dow Jones Industrial Average has been through three – possibly four – secular consolidation periods, one secular bear market and four secular bull markets. This interpretation is from a mega-macro perspective and obviously, on a more micro view, there have been numerous shorter term bull, bear and consolidative periods. In actuality all of the most devastating past cyclical bear markets - giving exception to the Great Depression - have occurred within secular consolidative channels. However, for the illustration of my underlying theory, we only need to take into consideration the larger macro point of view for now.

Data Range		Price Action	Duration	P/E Ratio
Jan 1906	July 1924	Secular Consolidation	18 Years, 7 Months	Declining
July 1924	Oct 1929	Secular Bull Market	5 Years, 3 Months	Increasing
Oct 1929	Aug 1932	Secular Bear Market	2 Years, 10 Months	Declining
Aug 1932	Jan 1937	Secular Bull Market	4 Years, 4 Months	Increasing
Jan 1937	Jan 1950	Secular Consolidation	13 Years	Declining
Jan 1950	Jan 1966	Secular Bull Market	16 Years	Increasing
Jan 1966	Oct 1982	Secular Consolidation	15 Years, 9 Months	Declining
Oct 1982	Jan 2000	Secular Bull Market	17 Years, 3 Months	Increasing
Jan 2000	Present	Secular Consolidation	7 Years +	Declining

The ability to analyze the past is one of the most important tools we have in the assistance of understanding today. For this reason, following the review of the aforementioned historical technical price trends and its correlation to the P/E multiple, we are obligated to make some observations.

• Subsequent to every macro technical uptrend, a macro consolidation period or excessive sell-off has immediately followed and correlated in length of time.
• Consolidation periods have ranged from 13 to almost 20-years in length, not including the excessive market sell-off of the Great Depression.
• P/E valuation trends have corresponded to every technical market uptrend, consolidation period and massive downturn.
• Market breakdowns have all occurred after the P/E multiple breached the 22 “overvalued” level and proceeded to break its upward trend.
• Breakouts from consolidation periods or new uptrend’s have not resumed without first having the P/E ratio multiple drop below the “undervalued” level of 10.
• The first market sell-off and corresponding bottom of a macro consolidation period normally constitutes the floor of the large technical channel which has begun.
• All historic technical market channels have contained a plethora of 30 to 40% price fluctuations.
• Within all the prior secular consolidations there have been multiple occasions in which the market has broken above the channel for a relatively short period of time only to crash back through and start a cyclical bear market that journeyed toward the bottom of the respective LT channel.

Distilling data to increase probabilities; that’s the name of the game!

Resulting from this work, it is our contention that in all likelihood the market has entered yet a fourth consolidation period whose channel logically ranges from a 7,200 low to a 12,000 high. Also inherent within this contention is the idea that the channel will not end until the P/E multiple again crosses back below the undervalued 10 level. Most likely this will not transpire for many years to come and be aptly related to the length of time of the latest bull run – nearly 18-years. Based on our analysis we believe the channel began in 2000 – well, you do the math.

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