10 February 2007

the DOW in 200 days... WTF?


The DJIA is comprised of 30 major stocks that are weighted in calculating the average and thus it is more easily manipulated by the trading of few dozen millions of dollars in a day's session than are other averages such as the S&P500. Still even the DJIA is subject to real market forces over time.
But the action of the DOW from the middle of July 2006 to today is most unusual, having climbed 18% in seven months in an uncorrected linear way. (see graph) Going from 10,700 to 12,700 in 200 days.

What could explain a more than 2.5% gain per month, uninterrupted, during a period of national elections, 3 wars in the Middle East, dramatic slowdowns in the U.S. housing market/overall economy, and the introduction of a new nuclear-weapon power on the world's stage (NKorea) plus the pending geo-political tensions over another? (Iran)

Well, let's see what has happened in the past seven months.

On July 12, 2006 the Israelis began spending $5billion to destroy $20billion worth of Lebanon's infrastructure. The very same week in July 2006, OIL prices peaked at $77 and began a 12 week plunge to $56 (nearly 30% decline) bottoming out in late October just a week before the U.S. elections that produced a divided government. Less than two weeks before the Israelis invaded Lebanon and OIL prices peaked, the FOMC (FED) raised %rates a quarter point for the 17th time in a row to 5.25% and then has not raised it again since.

U.S. GDP was reported at 1.6% growth for 3Q 2006, down from 2.6% the previous quarter and further down from 5.6% in the first quarter of 2006. Rebounding to an initial report of 3.5% growth rate for the last quarter which comprises almost half of the period under examination here.

During such dramatic changes in market forces, geo-politics, and domestic politics, the DJIA steadily gains 18%?

Something is very, very wrong here.

Unless Wall Street has such faith in divided government's ability to reign in future U.S. govt spending and military/foreign policy imperialism, as well as continuing favorable monetary policy from the FED (no more %rate hikes, perhaps even a reduction) .

Even then, U.S. consumer debt, USGOV debt, and the housing markets will force the FED to make a decision this year whether to support the USD (dollar) with %rate hikes or continue to help the Dollar devalue slowly and controllably by reducing %rates to help repair the damage done to the housing markets (and thus consumer spending) during the last 5 quarters.

Logic, history, and experience dictate that one should expect a rather large correction in DJIA during the next few months. But then everybody knows that, and the markets have a most curious way of thwarting such consensus expectations. Therefore, I expect a plateau between 12,300 and 12,700 until the summer is over unless...

War breaks out with IRAN (unlikely)
OIL goes above $80 (signalling OPEC's open declaration of "war") (unlikely) GOLD goes above $750 (likely, if the FED lowers %rates)
CHENEY resigns (which I've predicted... the markets will soar if so)
Housing Market breaks down further & faster (very possible)
or the most powerful factor of all (besides nuclear or terrorist attack)

the FED increases % rates to quote "fight INFLATION" (damifino)

Remember that because of INFLATION during the past six years, the DJIA would have to rise to over 13,250 in order to be equal to the purchasing power of the January 14, 2000 high of 11,722. In such terms the DOW still has some catching up to do.

stephenhurleysmith
11feb2007