As the Dow Jones Industrial Average (DIA) approaches the 12,000 level, we believe it is necessary to review our analysis leading up to this point. There have been indications that the market would knock on the door of 12,000. And we’ve been at the forefront of this analysis very early on.
Starting as early as February 12, 2009 (article here), we warned that despite the declining trend in the markets, history has proven that declines of 40% or more tend to retrace 60% to 100% of the previous decline.
In September 2009, after reviewing the Coppock Curve (article here), we pointed out that if the market held up in October 2009 that 12,000 on the Dow would not be an unrealistic price target.
In January 2010, we mistakenly thought that the Dow had a good chance to reach 12,000 by February 2010 (article here). Although we were woefully inaccurate in the timing of our estimate, we were convinced that 12,000 as an upside target was not unreasonable.
On March 23, 2010, we came out with an article that highlighted what we thought was confirmation of a cycle low in the market on February 8th (article here). In retrospect, although it was a major low for the year 2010, it was not as significant as the July 2010 low. However, we reiterated 12,000 as the target for the Dow.
Our eyes are now trained on the next target for the market. This is where our “analysis” is put to the test. All along we’ve thought that a rise from 6,400 to 12,000 would not be very unusual. However, getting back to even, or 14,164, will be very challenging. There are many who feel that external forces have falsified the markets rise.
As far as we’re concerned, we’ve accomplished the target that was long since projected and is now upon us. As we’ve indicated in a recent article, the Dow Industrials’ upward trend has less to do with the actions of the Federal Reserve and more to do with the corrective nature of markets after a significant plunge like in the period from October 2007 to March 2009 (article here).
We’ve noted in the article titled “Diversification Doesn’t Matter” that declines in the Dow will be amplified in the S&P 500 and Nasdaq Composite Index (article here). Exposure to these diversified indexes through the use of index funds and ETFs will result in surprising losses that defy the theory of diversification as was the case in 2008.
We believe that as long as the price of gold keeps moving higher in conjunction with the Philadelphia Gold and Silver Index (XAU) and Dow Theory confirmations of the bullish trend continue, there is a good chance that the market will retrace 100% of the previous decline from 2007 to 2009. At times like these, the rise and fall of the price of gold may be a leading indicator for where the market might be headed. Our numerous articles on the correlation between gold and the stock market have proven to be correct for those willing to accept the data from an unemotional standpoint (article link).
Although it is not unusual for markets to retrace 100% of a prior decline of 40% or more, we’re more than willing to figuratively step aside and watch what happens next. However, we cannot help taking another stab at when, and not at what exact level, the Dow Industrials will peak. Two prior articles on the topic are the basis for our thoughts on the prospects for where the top may occur.
On June 14, 2010, we wrote an article titled, “A Market Cycle Worth Observing” (article here). In that article, we reminded readers of the consistency of 4-year cycles to provide key markers for tops and bottoms in the market. We included referenced from Charles H. Dow’s era, founder of the Wall Street Journal, from 1901 and prior. We gave examples as provide by Richard Russell from 1953 to 1979. We were even able to provide examples from the period between 1987 and 2009.
If there really are 4-year cycles, as we contend, then October 2007 would stand as the marker for the last peak in the cycle. In theory, the mid-point for the peak would be some point in 2009. For us, March 9, 2009 represents the low or mid-point for the 4-year cycle. Our estimate is that the full 4-year cycle should be completed with the Dow Jones Industrial Average peaking at some point in 2011.
According to Dow Theory, the downside target is set at 9,273.50. If this level is breached in conjunction with the Dow Transports, then we could consider a bear market has been initiated.
The second article that we derived our view of the market is dated April 11, 2010 on the topic of Dow Theory (located here). In that market analysis, we proposed, in addition to the fact that the Dow Industrials “…could go to 11,574.59 with no problem,” we outlined three hypothetical scenarios under which the Dow Industrials would reach 14,164.
In retrospect, and upon further analysis, we realized that those projections were really indications for when the market would top irrespective of the exact level that the top would occur. It seems to us that the period from January 31, 2011 to June 18, 2011 is the timeframe for when the completion of the cycle should take place.
Despite our concerns for an eminent top in the market, we will continue to buy and sell individual stocks. From our experience in 2008, gains can be obtained from individual stocks within the context of a declining trend in the market. In fact, during 2008 there were only three months where losses were registered which were June, October and November. Although these months incurred substantial losses, 2008 ended with overall gains of 14% in our portfolio (article link).
