I’d like to turn the keyboard today over to my colleague Anthony Jasansky, P. Eng. He’s been a 30-plus-year student of the Dow Jones Industrial Average, and I agree with what he says below in his analysis of the where the market is headed between now and the end of 2012.
As Anthony says below, as traders increase or lower their positions over the next four weeks; I see the uneducated popular media blaming the on/off “fiscal cliff” for the market’s gyrations. But the bottom line is clear: each year since 2009, the yearly increase in the Dow Jones Industrial Average has been getting weaker and weaker.
Here’s a chart showing the annual increase in the Dow Jones Industrial Average since 2009:
Market Insider Bulletin, December 2012
2009: Dow Jones Industrial Average increases 18.8% over 2008
2010: Dow Jones Industrial Average increases 11.0% over 2009
2011: Dow Jones Industrial Average increases 5.5% over 2010
The common denominator in the above chart? In each year since the Great Recession, the Dow Jones Industrial Average has logged a gain of only 50% to 60% of the previous year’s gain.
If today was the last trading day of the year, the Dow Jones Industrial Average would be up 6.6% for the year. In keeping with the three-year trend, the Dow Jones Industrial Average would have to fall about 400 points between now and year-end. I see this move on the downside as being more of a reality than an upside move.
Here are Anthony’s comments as promised:
“The quandary with the Fed’s monetary magic is that it no longer gives the Dow Jones Industrial Average the same boost that it did back in 2009 and 2010. The chart below shows that each of QE1, QE2 and QE3 was followed by progressively smaller stock market gains. To keep the economic recovery alive, the Fed has been capable of inventing newer, never-seen-before, monetary tools.
“Actually, for months now, investors have been more focused on the haggling between the White House and the Congress over solutions to the ‘fiscal cliff’ than on the Fed. The latest statements issued by the two sides are now media fodder and a convenient explanation for short-term market swings.
“High frequency traders probably thrive in this market, while public investors keep on reducing their equity investments.
“The technical group of indicators I follow has turned mildly negative. The recent Dow Theory sell signal, based on the divergence between the Dow Jones Industrial Average and the Dow Jones Transports, is the most bearish component. Insider trading is very bearish. The other bearish component is the fear index VIX, back on the edge of the danger zone below 15. In summary, beyond the erratic swings caused by the Washington bazaar, I expect no major market shifts for the rest of 2012.”
What He Said:
“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in Profit Confidential, December 4, 2007. This devastation started happening the first quarter of 2008.
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