A number of you have noticed that the Dow Jones Industrial Average (Dow) is making new highs. How could that be if we are in a bear market and how high will the Dow go? Let me remind everyone that the Dow expressed in the value of gold (Dow/Gold ratio) is NOT making new highs.
Since August of 2001, Gold was skyrocketing and the Dow was also going up but not as fast so up until 2010, the ratio was going down. Since then, gold went down while the Dow kept going higher. As you can see, we've had a "Bear Market Bounce" in the value of the Dow relative to Gold but we are far from making new highs. You might note that right at the end the ratio is again heading lower.
Monthly Charts:
Okay, how much higher will the Dow go? If I knew that I'd be on the French Riviera! But I do believe we might go to 20,000 but not much higher.
This is based on a number of things. There is a number of periodicities or cycles to the stock market. We've talked about the Kondratiev Wave being one. There is also a "Presidential Cycle". It obviously cycles every 4 years. (Trading Trends).
Here's a chart since 1946:
Note that in year 4 of the president's term, the market rose 81% of the time. How accurate is it? I dunno. But a lot of people believe in it so I wouldn't discount it. There is the Elliott Wave Principle that I've mentioned that I have been studying religiously for a few years. I'll talk more about that in a later blog. But it continues to point up probably until the end of the year.
Finally there is the Dow Theory in which in which during the 1890's, Charles Dow (of Industrials Fame) established investing parameters. It states: "Mechanically speaking, a traditional Dow Theory sell signal is
predicated on three developments: First, the (Dow) Industrial and (Dow) Transport
averages must undergo a significant correction from new highs. Then,
during the subsequent rally, one or both of the averages must fail to
recover above their prior highs. Finally, both averages must fall below
their prior correction lows." (Financial Sense) So let's look at that:
We've established the first and second parts; after a significant low, the Dow Industrials have hit new highs. But the Dow Transports are really lagging! The third part of the Sell Signal is for both indexes to go below their respective lows as outlined by the lower bottom lines. No confirmation yet. But I'll be watching for it!
Also remember that the Dow only has 30 stocks in it. These are the best companies in the world! Not all stocks are making new highs. The banking sector is a good example.
Bank stocks in S&P 500:
Some of you might ask, well how about investing in gold? Fagetaboudit! Gold is a commodity and will continue to head lower over the next few years due to DEFLATION. Remember CASH IS KING!!
So when the "Bear Market Bounce" ends, be prepared of a major selloff.
Until next time.
Best regards,
Ken Knight
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