Home > Uncategorized > Market Notes: 26th August, 2011

Market Notes: 26th August, 2011

The DOW, though not my favorite proxy for US equity markets, presents an interesting view of the present correction underway in US blue chips.  Note that the composition of the DOW has so changed that it is best to view the index as what Wall Street would LIKE YOU TO SEE, rather than the full story as revealed by say the Russell 2000 or 5000. Nevertheless, DOW makes sentiment.  And the value of sentiment is very hard to overestimate in equity markets.  With that caveat in place, let us take a look at DOW starting September, 1990 when most of the last major bull markets started their run up.

 

DOW had a classic bull run from September, 1990 to May 1999.  It was just up and up all the way with few minor corrections bearing all the characteristics of a parabolic rise from 2360 to 10,930, a near fivefold rise.  The sheer momentum behind the rise, fuelled in part by the tech bubble within the larger bull market for equities, showed it was something like the first part of run-up that you see in Wave V of a bull market.

 

A complex correction followed the May 1999 high that in fact saw a higher high at 11,750 in January of 2000.  The DOW then went on to make a low of 7750 in October, 2002 in a correction that lasted over 2 years.  The last phase of the great Bull Run started in October, 2002 and peaked in October 2007.  We are now in the process of correcting or validating how much of the Bull Run up from 1990 to 2007 is in fact sustainable by increase in profits and other valuation metrics.  That is what this correction is all about.

 

One way, but not the only way, to “read” the correction that started in the DOW in October, 2007 is to note that the first leg of the fall took it low of 8400 over a period of approximately one year.  It then spent some time trying to make a base around that level and finally rallied from low of 6400 in March, 2009 to end up at 10,470 in December, 2009.  From there the DOW has been in a complex “correction”, but with an upward bias, between two upward sloping trend lines that are obvious from the charts. The low of 10,600 on the DOW on 9th August was in fact a successful test of the lower of these two trend lines.  That doesn’t mean the DOW will continue to move in this channel.  But it helps to “uncover” the larger corrective pattern that is obscured by the clutter and noise in the charts.

 

Taking 12,900 as the last peak on the DOW and doing a wave count from there shows we are in somewhere in the 2nd half of the Wave 3 down whose first low is at 10,600 followed by a more credible support 9,800. If you were looking for a place in time where the correction to the 1990-2008 bull market would end, January of 2012 happens to be the right place to look at. Hence the wave count down from 12,900 has added significance. The worst is not over yet.  However, if market action from here on validates this scenario, [a big if] then one can hazard a guess that the bottom will be found somewhere between 9,800 and 10,600 before the end of December, 2011.  So the awful doom and gloom in the news flow may not be the right way to look at the market. At least the charts don’t justify an end of the world scenario often imbedded in the headlines.  Note, I wouldn’t buy the markets until the market actually validates this analysis by its price action.  So this is just a frame of reference against which to view the ensuing price action as it unfolds in order to be able to flag surprises as they happen.

Having said that, the DOW is bearish till the end of this year but not all that bearish as it was in 2008.

 

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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Categories: Uncategorized
  1. August 27, 2011 at 5:59 pm

    You see something long-term that I don’t. I look at the S&P and I see a head and shoulders on the weekly and 1240-1270 playing a key in the medium term chart structure. I imagine we may get a bounce to those sort of levels, but longer-term the structure seems to suggest we’ll test 500 at some stage, where the original bull market started. Looks like a full five waves down on the weekly, 3 wave correction – suggesting a high probability structural bear market. So I read it differently.
    That said, fundamentals aren’t decisive and we aren’t in a conventional boom-bust cycle, so I agree with the complex correction assessment, but my view is – bearish bias.

  2. August 28, 2011 at 12:50 am

    A structural bear market is possible. Anticipating an upturn by end of this year from 9800 on the DOW doesn’t rule out that possibility.

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