Category Archives: Dow Industrials

Crypto Myth and Market Reality

The Myth

The prevailing theory is that the cause of the decline in cryptocurrencies lately is that the “banks” and Wall Street want to undermine the market for decentralized currencies to either steal the technology like the record industry and Apple (AAPL) did with Napster, or to eliminate a viable competitor to the Wall Street and banking industry cabal.

The Reality

The reality is that, like the introduction of every new technology that turned out to be revolutionary and widely dispersed to the point that it became second nature in its use and profound in it’s application, the price/value of such technologies is only relevant to the use.

In the formative stages (right now), blockchain technology is trying to find its footing in the world.  Make no mistake that blockchain is here to stay and it will likely permeate everyone’s lives, like it or not.  However, as with the canal, railroad, airplane, automobile, computer, biotechnology, and internet bubbles before, there will be thousands of contenders but only a dozen survivors (at most).  The risk of loss is significant when there are more than a thousand different cryptos out there and we all know there should be two dozen, at best.

The Market Reality

Everyone loves a great conspiracy theory.  However,  The last week of market volatility is proof that when everyone wants to sell, it doesn’t matter what they are holding.  Take for example the Dow Jones Industrial Average (DJIA) and Bitcoin (BTC).  The chart below shows the hourly percentage change in BTC  (cryptocurrency) versus the DJIA (Wall Street/bankers) from January 30, 2018 to February 5, 2018.

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In the last week, it should be more difficult for someone to make the claim that Wall Street is pushing down cryptocurrencies while at the same time, Wall Street is falling as well. 

Our take on the matter is actually quite the opposite of the conspiracy theory, if Wall Street can continue to rise, there will be more money and enthusiasm to fund hair-brained ideas within the crypto space.  However, when the money drains out of Wall Street, it will also drain out of all the cool ventures that support and ensure the organic growth of the crypto environment and at a ridiculous rate.

The question might come up as to why BTC is crashing more than the DJIA if everyone is selling in all markets.  In a nutshell, familiarity.  The DJIA has been around for more than 120 years.  BTC has been around for less than 10 years.  Anyone unfamiliar with the risks of a new venture is naturally going to be more skittish when the old line investment (DJIA) is crashing, on a relative basis, and therefore would put into question the more dubious blockchain ventures, this in spite of blockchain technology possibly becoming bigger than the concept of money as we know it.

In Closing

As indicated above, cryptocurrency investors should embrace the idea that a rising stock market allows more money to go into more wasteful, and potentially lucrative, ventures in the blockchain universe than a falling stock market.  Just for the sake of better understanding the point we’re trying to make, get a copy of the book F’d Companies: Spectacular Dot-com Flameouts by Philip J. Kaplan.  You’d be surprised to know that even though there are some ridiculous concepts for dot-com companies, there are still many that would be incredibly lucrative today if the stock market didn’t crash like it did from 2000-2003.

Fastest 1,000 Points or Slowest +4.17%?

Saw this headline and almost did a spit-take.

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Fortune Magazine claimed to “fact check” whether history shows that this was the fastest 1,000 points.

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Sadly, Fortune never actually compares the current +4.17% gains to any other in the 122-year history of the DJIA.   You have to wonder if Fortune included the 15 years after 1972, when the Dow finally crossed over 2,000. 

To their credit, Fortune does say, “…the Dow has grown larger over time, meaning a 1,000 point move today is less significant percentage-wise compared to such a movement 20 years earlier.

Again, for the Dow Jones Industrial Average (DJIA), going from 24,000 to 25,000 is equal a +4.17% change. As noted in Fortune, on a percentage basis, +4.17% isn’t much.  However, we have listed the gains above +4.18%  that took less than 34 calendar days since 1896.  Although there are too many to show, we’ve only relegated this to the last 45 incidents from the lowest percentage gain excluding multiple events in the same year.

Date DJIA % change days
July 21, 1897 4.21% 10
June 29, 1938 4.21% 1
November 27, 1905 4.22% 1
April 5, 2001 4.23% 1
November 30, 2011 4.24% 1
March 4, 1926 4.38% 1
December 24, 1902 4.43% 8
November 1, 1978 4.46% 1
November 2, 1904 4.50% 7
November 26, 1963 4.50% 1
January 15, 1934 4.52% 1
January 17, 1991 4.57% 1
February 9, 1931 4.62% 1
June 19, 1930 4.63% 1
May 29, 1962 4.69% 1
October 28, 1997 4.71% 1
October 9, 1974 4.71% 1
June 12, 1940 4.73% 1
February 11, 2010 4.75% 3
August 17, 1982 4.90% 1
March 16, 2000 4.93% 1
November 16, 1933 4.93% 1
November 12, 1896 4.93% 8
September 8, 1998 4.98% 1
May 17, 1915 5.02% 1
May 27, 1970 5.08% 1
October 16, 1903 5.11% 1
January 27, 1899 5.36% 20
August 17, 1898 5.41% 12
August 11, 1909 5.43% 22
December 22, 1916 5.47% 1
November 22, 1920 5.51% 1
February 5, 1917 5.77% 1
October 20, 1987 5.88% 1
October 20, 1937 6.08% 1
January 19, 1906 6.08% 14
October 7, 1929 6.32% 1
July 24, 2002 6.35% 1
May 10, 1901 6.37% 1
March 15, 1907 6.69% 1
March 23, 2009 6.84% 1
January 6, 1932 7.12% 1
November 10, 1911 8.27% 14
January 14, 1908 8.61% 11
September 5, 1939 9.52% 1

Stock Market Context is Invaluable

As market pundits either celebrate or examine the stock market crash of 1987, there comes point when all analysis becomes a form of paralysis. Some say a crash won’t happen again while others proclaim, almost daily since the 2009 low, that a crash is just around the corner.  When posed with such a question, we always ask, what is our point of reference?

To arrive at a point of reference, we read an article that says that the S&P 500 has had it “Too good, Too Long.”  We liked this reference point as it charts the S&P 500 from 1996 to 2017.  We decided to use the same number of trading days for the Dow Jones Industrial Average going backwards from the 1987 peak at 2,722.42, which led us to the beginning of 1966.  When you contrast the price activity of the S&P 500 against the Dow Jones Industrial Average over the two periods, we get a point of reference that is all too telling.

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Our observations of the market leading up to the the peak in the Dow Jones Industrial Average on August 25, 1987 contrasted with the S&P 500 since 1996 tells us a few things that need pointing out.

First, nothing that has happened in the exact same number of trading days between the two indexes is unique.  The Dow had declines of –35%, –44%, and –26% in the late-1960’s and 1970’s.  Likewise, the S&P 500 experienced declines of –49% and –56% in the period of late-1990’s and 2007-2009.

Second, the rise from the lows could be considered to be almost equal. If we take the low of 2009 for the S&P 500 and compare it to the corresponding low in the Dow Jones Industrial Average, based on the same number of trading days, we find that the increase in the S&P 500 is not unusual at this point as compared to the Dow.  From the 1978 low in the Dow, the index gained +266% to the 1987 peak.  The 2009 low in the S&P 500 Index the gain has been +278% so far.  If we take the ultimate low in the Dow Jones Industrial Average from 1974, the increase was +371%.  This puts the S&P 500 well within the range of “normal” for a market rise.

Third, looking at where the Dow Jones Industrial Average was and where it currently is, there is little to suggest that the action of the S&P 500 cannot go a significant distance above the current level with moderating declines in between.  Does the S&P 500 have to do in the future what the Dow Jones Industrial Average has done in the past?  Absolutely not!  However, looking at what has happened could help to put the coming decline in the market into proper context.  As our latest bull market ranking has demonstrated, there is still a lot of upside potential in this market. 

In reality, a market crash is always on the horizon. Also, when data is provided, if there is no context then there is no meaning or value. So, what should investors being doing now in preparation for the next crash? Our opinion is that investors should stockpile cash as the stock market increases.  Use that cash for when the next stock market decline ensues.  Educate yourself on investment values and be ready to hold your nose and buy those values at significant lows relative to prior peaks.

Earnings Recession Over?

The chart below outlines the Year-over-Year (Y-o-Y) percentage change in the S&P 500 earnings since 1960.  From what we can tell, the slide from the 2010 peak in Y-o-Y earnings in the S&P may have bottomed in 2015 and is on a path to the 2013 peak which could be followed by the 1964 recovery peak.

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What stands out about the current move upward is the fact that the decline went into negative territory.  While the decline wasn’t as low as we’d like, at or below the 1970 level, we have to accept that there are few times this indication went negative without a very strong recovery to the upside.  For now, we’re hedging our commentary by watching for the 2013 level before going on to the 1964 peak. 

However, we suspect that the recovery in S&P earnings could test the 1976 peak.  What does that translate into for the stock market.  Although not as low as the 1975 trough, the Dow Jones Industrial Average nearly doubled within a two year period.  Let’s call for a +50% increase in the Dow Jones Industrial Average from the 2015 low.  This would bring the index to 24,153.57 by 2018.

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Analyst Estimates: DJIA November 2016

Below are the price projections based on analyst earnings estimates for the Dow Jones Industrial Average as of November 4, 2016. These estimates project the price change for the respective stocks over the next 12 months and the risk profiles associated with the estimates.

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