"A Monumental Opportunity"

10/21/2005 12:00 am EST

Focus:

Harry Dent

Author, The Demographic Cliff

"We couldn’t be more bullish for the next year, and the next five years," says Harry Dent, noted author and advisor. "We are clearly on the verge of a major break out to the upside." Here, he looks at the history of market "bubbles" and offers his long-term bullish outlook.

"We are finally getting very close to the last great buy opportunity ahead of perhaps the greatest five-year stock bubble in history. Most forecasters are taking this long trading range as a sign of minimal growth potential. But history clearly says otherwise. Every stock market bubble in the last century—1915 to 1919, 1925 to 1929, 1935 to 1937, 1985 to 1987, and 1995 to 1999—followed this scenario. The upside bubbles were preceded by a major correction or crash, a strong initial recovery rally, and then a one-to-two-year trading range sideways. That is what we have seen in the current market. We could throw out every major forecasting tool we have and still be unabashedly bullish on this clear pattern over the past 20 months.

"For example, the first bubble in the last New Economy Cycle was from 1914 to 1919 as autos and other new technologies were first accelerating up their S-Curve from 10% (1914) towards 50% penetration (1921). The entire bubble saw 1,900% gains in just under six years. The present trading range pattern is correlating very closely with the bubble in the Roaring 20s from mid-1924 to late 1929. In the 20 months before December 1924, the market went sideways with a slight upward bias, just as is occurring today. The Dow advanced 342% from the bottom of the trading range to the top in late 1929. Following this pattern today suggests that we should be very close to a strong rally that breaks out of the trading range by December at the latest.

"The market also traded sideways for 22 months into mid 1935, before it advanced 134% into early 1937. The entire bubble from the bottom in mid 1932 to the top in early 1937 saw the Dow go up 388%. The three bubbles —1915 to 1919, 1925 to 1929 and 1935 to 1937—all came when radical new technologies first advanced into the mainstream creating productivity, growth in new industries, and changes in business models. Also note that most of these bubbles last for only about five years before finally peaking.

"The next bubble came in the 1980s with the early stages of the current New Economy Cycle. Stocks bottomed from a long correction in late 1982. Then there was a strong recovery rally into January of 1984, followed by an 18-month trading range into July of 1985. Then we saw a bubble build into August of 1987 wherein stocks advanced 155% in less than three years. The entire bubble from late 1982 to late 1987 saw gains of 260%. In 1994 the Dow traded sideways for 12 months before breaking up 226% into January of 2000. The correlation here with today’s patterns is pretty close as well. Following this pattern, we would likely bottom close to 10,200, at slightly higher lows than 10,000 in late April.

"The forecast that we are making for a strong bull market and bubble ahead is still extremely contrary. Even the smart money does not foresee such a strong rally ahead. In our view, stocks are poised to break up strongly just ahead. The markets are now moving into our buy target range. We are issuing a major buy signal between 10,200 and 10,270 on the Dow and 2,045 and 2,070 on the NASDAQ. The lowest we see the markets going would be 10,000 on the Dow, so the downside is still very limited. But we wouldn't advise getting greedy here and wait; we advise buying now. Our targets for the Dow are 14,000 to 15,000 by August of next year. Overall, we see a monumental buy opportunity here for the next year and five years to come."

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