Steve,
The pattern in the Dow is a reversal pattern. I know a lot of investors view TA as less than valuable, but I've found over and over again, the patterns that form in charts are based on fundamentals. When I see a bad chart my fundamental research tends to be focused on why the chart looks the way it does.
In the case of the Dow, which to a large extent reflects the market in general, we've had over a decade of what Greenspan referred to as "irrational exuberance". GAAP became more and more creative, and farther and farther away from the true fundamental conditions of the underlying companies. Momentum tends to feed on itself and the pattern in the Dow is a classic example of what happens when the momentum vanishes and the trend reverses.
When the dot com bubble burst in the first half of 2000, it was basically the first domino to fall. $3 trillion in market cap vanished in a year's time, and with it a lot of high income tech employment. The unemployment level has nearly doubled since then and consumer credit has skyrocketed along with default rates and bankruptcies. At the same time the cost of living has also skyrocketed over the past 2 years as businesses try to make up for lost volume with higher margins. In the mean time another $4 trillion in market cap has vanished from the economy. Nest eggs for rainy days, which should have been in cash, have evaporated, forcing consumers into the debt market since there is nothing in savings to dip into.
It comes down to an instant replay of the 20s when novice investors leveraged their accounts to the tune of 10 to 1 to play the stock market. The only difference is the leverage is in the form of unsecured debt and over leveraged real assets. What it amounts to is consumers borrowed money to play the stock market, and the price of the stock no longer covers the amount borrowed. It became a common practice to max out the Master Card in order to hold losing positions in mutual funds and individual stocks. As more and more people are forced to liquidate their equity positions to service their debt loads, the situation will continue to feed on itself, and the reversed momentum will accelerate. In short, the fundamentals of the economy verify the reversal pattern in the chart.
Based on the chart and the underlying economy, I'd say a crash into the lower 6000 to higher 5000 level is likely sometime within the next 6 months. And all the king's horses and all the king's men won't be able to put Humpty Dumpty together again. |
