Friday, June 25, 2010

Apocalypse Dow?

As the Dow (DJIA) continues to drift down towards 10,000, it is interesting to note a recent observation from a column of the Intelligent Investor in the WSJ personal finance section:


The 11-Year Itch: Still Stuck at Dow 10000
Last week, the Dow Jones Industrial Average rose above 10000—again. Since March 16, 1999, when it first touched 10000 in intraday trading, the Dow has bounced over that threshold and back 63 times. This Friday, the index closed 219.6 points below where it stood exactly 11 years ago.

This isn't the first time stocks have been stuck on a seemingly endless pogo-stick ride. On Jan. 18, 1966, the Dow hit an intraday high of 1000.50. It broke through the four-digit barrier three more times that January and February, then faded. The Dow cracked 1000 again in 1972 and 1976, then fell back both times. Not until December 1982 did the Dow finally hurdle above 1000 and stay there.

Will Dow 10000 turn out to be a long replay of Dow 1000?

Of course, financial history doesn't repeat itself—and even when it rhymes, the sounds can be almost unrecognizable. Inflation, at roughly 7% annually, was much higher from 1966 to 1982 than it is today, devouring all the return on stocks. And during the 1970s, according to an analysis for The Wall Street Journal by Wharton Research Data Services at the University of Pennsylvania, the Dow captured only about 15% of the total value of U.S. stocks, versus 30% today

Guambat once made some notes and observations about the prospects of a repeat of the Dow 1000 experience around the Dow 10,000 mark, back in 2002. But he did it one better (perhaps) by taking the idea all the way back to Dow 100, which was the pivot point around which the Great Crash in 1929 occurred.

The paper was discussed, and a link to the paper provided, in this post about a year ago: The battle of Bull Runs and Bear Runs

He even went so far as to state pages of historical events of the Dow 100 era and the Dow 1000 era, in chronological order, to emphasize the point that the historical facts and circumstances were sufficiently different as to give no clue that the stall in the Dow, otherwise called a secular bear market, would occur at any particular interval.

But he did note (back in 2006 in this post and the chart in it: Analagous?) that the technical consolidation that occurred at Dow 100 and again at Dow 1,000 looked to be occurring again at Dow 10,000, notwithstanding some interim cyclical bull and bear moves.

Here is an updated version of the 2006 chart. In this one, rather than using a rectangle, there's an ellipse, which is just a haphazard guess as to the shape the Dow 10,000 consolidation may take (if it does complete a secular consolidation here), and the time frame in which it might conclude. This is wild speculation, mind you. More Rorschach than prophecy.

(Click to enlarge; right click to enlarge in new tab.)

And while Guambat agrees with the WSJ article that history doesn't repeat and may not be recognizable when if rhymes, he is mesmerized by the possibility, however remote, that market behavior could be so simplistic as to predictably consolidate around a 10 to the 10th interval.

Why, if that were so, once this bear plays out, you could postulate Dow 100,000!!. As outlandish as that is, it is no more than to predict Dow 1,000 at Dow 100, or Dow 10,000 at Dow 1,000.

In the WSJ article, it was mentioned that this inability to shake off Dow 10,000 and move on was called "'quadraphobia', or the fear of a four-digit closing value for the Dow".

At least one Elliott Wave theorist will have none of that quadraphobia, however. This one fears a three-digit closing value for the Dow, in what can only be described as an Apocalyptic vision.

Elliot Wave predicts triple-digit Dow in 2016
An investment letter that called the Crash of 2008 said that this would be a bad year -- and it now says it will get worse.

A whole generation of investors think that Robert Prechter and his Elliott Wave Theory letters, Elliott Wave Financial Forecasts and Elliott Wave Theorist, are permabears. But Prechter was very bullish after the 1974 low

Elliott Wave Financial Forecasts (EWFF) makes recommendations specific enough to be tracked by the Hulbert Financial Digest. (The Elliott Wave Theorist is too, well, theoretical.)

The EWFF issue published in early May said flatly: "The topping process is over for the countertrend rally that started in the first quarter of 2009. The next leg lower that commenced in April should now deliver a decline that will ultimately be bigger than the 2007-2009 sell-off."

How bad? The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory's complex patterns: "The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016."

"Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions."

Elliott Wave Theorist offers several reasons, including: "This bear market is of Supercycle degree, the biggest since 1720-1784. It should therefore include a decline deeper that the 89% decline of 1929-1932. A decline of 91.5% or more would carry it below 1,000."

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: "The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair."

Wow, and Guambat was ruminating about how bearish his view was getting. He's only thinking the apparent cold/right shoulder the Dow seems to be making these days will take it down but within the parameters of the last low, perhaps not piercing it, staying roughly in the bounds of the ellipse.

Guambat's money is on the side line for the time being. All two cents worth.

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