Dow 10,000: It Was Fun While it Lasted

by JDH on October 17, 2009

Note to readers: play a drinking game. If you are reading this in the morning, take a swig of coffee every time I mention the number 10,000. If you are reading this anytime after 11:00 am in the morning, take a swig of something stronger.

Well, we got to spend three days flirting with Dow 10,000 this week. It was fun while it lasted, although by the end of the week we were back under the 10,000 level. Not that this was our first flirtation with Dow 10,000; by my count we have crossed 10,000, one way or another, over 20 times before, so it’s no big deal.

Or is it? Perhaps our long day’s journey into night is finally over, and we are shaking the mortal bounds of 10,000 once and for all. It depends on how you look at it:

Dow10years

If you look back over the period from March 12, 1999 to today, you see that the Dow is virtually unchanged; it was around 10,000 then, and more than 10 years later it’s around 10,000 now. Not much glory there.

DowSincePeak

Since the peak two years ago, in October, 2007, it would appear we are still in a down trend (see the red line). Of course since the bottom of the crash in March, 2009 we are in an uptrend (see the blue line). So which is it? Up or down? I have no idea, but a look at the RSI at the bottom of the chart shows that anything over 70 (the green line) is toppy, so if I had to guess, I’d be guessing that we are near the top, and a correction is imminent.

A look at the 10 year chart shows that Dow 10,000 was a significant support level between 1999 and 2001, and again from 2003 to 2006, so although 10,000 is just a number, it is technically significant. Support levels often turn into resistance levels, so I will be really surprised if we blow through 10,000 and get to 11,000 anytime soon. If we did get to 11,000 that would indicate that the down trend going back to 2007 has been violated, so a new bull market may be in the works.

How does this compare to the last big crash? Something like this:

On September 3, 1929 the Dow peaked at 381.17, and then fell to 198.69 on November 13, 1929, for a drop of 48%.

On October 12, 2007 the Dow peaked at 14,093, and then fell to 6,627 on March 6, 2009, for a drop of 53%.

Yes, I realize that from September 3, 1929 to November 13, 1929 was only 71 days, while the October 2007 to March 2009 drop was 511 days, but history never repeats itself exactly; it only “rhymes.” It could be that the massive government intervention we have witnessed over the last few years has prolonged the crash period, but has not changed it substantively.

Okay, more numbers. From the bottom, here’s the bounce:

From the bottom on November 13, 1929 at 198.69, the market recovered to 294.07 on April 17, 1930, for a bounce up of 48%.

From the bottom on March 6, 2009 at 6,627, the market recovered to 10,062 on October 16, 2009, for a bounce up of 52%.

The 1929 to 1930 bounce took 155 days; the March to October 2009 bounce took 224 days, so the bounce has lasted for a roughly similar period of time.

So, how does this story end? Here’s the chart (go to stockcharts.com to create your own long term chart). I have inserted the above Dow numbers from 2007 to 2009 as noted above.

Dow 1928 to 1935

Dow 1928 to 1935

From the peak of 294.07 on April 17, 1930, the Dow then fell all the way to 41.22 on July 8, 1932, a drop of 86%, over a period of 813 days.

So, if we take the peak of 10,062 on October 16, 2009 and wait for a drop of 86%, we get to 1,409 on the Dow, which would happen 813 days from now, or on January 7, 2012.

Do I actually believe that the Dow will spend the next three years dropping all the way to 1,409? No, I don’t. History doesn’t repeat itself exactly, or else we would all know the exact turning points in the market.

However, I have just given you an example of a market that dropped 48%, and then managed to bounce back up 48%. Stated another way, the market back in 1929/1930 managed to recover all the way to 77% of it’s previous high. Then, it really crashed.

We have just witnessed a market drop 53%, and then manage to bounce back up 52%. Stated another way, this year the market has managed to recover all the way back to 71% of it’s previous high.

(Yes, I guess if you want the exact parallel to 1929/1930, the market will recover to 77% of it’s previous high, or around 10,850, so there could be more room to run. But, as I said earlier, I doubt we will see Dow 11,000).

What do I think will happen. If I had to guess, back in 1929/1930 we saw a 48% drop and a 48% bounce. Last year we had a 53% drop, so I guess I would guess that we will have a 53% bounce, which will take the Dow up to somewhere between 10,100 and perhaps the 10,300 level. In other words, we could see a bit more “up” over the next week or two, but that’s about it. This rally has run out of steam.

(I would be interested to see Fibonacci Retracement levels attached to these charts. But I’m not interested enough to actually do the work of adding them).

Could I be wrong? Of course. I’ve been wrong all the way up, so I could very well be wrong this time as well. The Dow could cruise through 11,000 this week, which would be the exact opposite of what I’m expecting.

But ask yourself this: what happens if I am wrong? Nothing. I’ve been in cash most of this year, only holding selected gold and silver stocks, so the implication of my being wrong is that my portfolio is only up a few small percentage points this year. I haven’t lost anything; I just haven’t made anything.

If I abandon my beliefs now and go head long into the market, I could easily get crushed if the down draft resumes. So, I will continue to play it safe, and stay on the sidelines. Right now I am 15% in gold/silver stocks (as insurance) and 85% cash. If there is a crash, I will deploy the cash. If there is no crash, I make nothing, but I lose nothing.

If I’m expecting the end of the world (which of course according to the Mayans won’t come until either October 28, 2011 or December 21, 2012, depending on who you believe), why am I not loading up on gold? I probably should be, but we all remember the crash of 2008 where the baby got thrown out with the bath water (meaning all the good stuff, like uranium stocks, got sold along with the bad stuff so that traders could cover their margin calls). If that happens over the next few weeks, I would like to have some cash available to take advantage of the bargains.

What some other perspectives? I thought Davidslane’s post on What Should I Do? was quite good.

(Of course I also thought the post on CBS Marketwatch entitled: Obama Fails to Win Nobel Prize in Economics was also hilarious, so you can’t really trust my judgment).

Well, I guess we shall see what we shall see. I will continue to be a pessimist, until I’m proven wrong.

Feel free to agree or disagree over on the Buy High Sell Higher Forum, and if the world is still here, I’ll see you next week.

(And take your final drink, since this is the final time today I will mention the number 10,000).

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