Where is the DOW headed now?

The Dow Jones Industrial Average after hitting a bottom just below 6.5k in March 2009 is now trading up above 10K, a whopping gain of 50% for all those who bought in at 6.5K, so what could be the next move, would it up or would it breakdown yet again, is this the correction to the major downtrend that saw the Dow Jones loose more than 55% of its value in a matter of 1 ½ year between October 2007 to March 2009 or is it just a building phase of the new bull market, Lets delve into the history and look, the DOW started its most bullish phase in 1995 at 4K’s and ended it at 12K in 2000, although the DOW managed to break past 12K in 2006 we cant call this a new bull market because it just satyed above 12k for a year and then even broke the 2002 bottom, so all in all the 2000 – 2008 could be called timewise correction for the bull market from 1980 – 2000, The Dow after cutting about 7.5k points from 14k to 6.5k has added about 3.8K points to trade at 10.3K that is it cut 50% of the fall which could be still called a correction, at the same time it reached the lower trough of the trading range of 10 -12K where it traded in 2000 – 2002, and 10 – 11 K trading range of 2004 – 2006, now this lower tough of about 10K which acted as a support that time could be the resistance this time round, so the level of 10K should be watched, also the markets don’t go down or go up in straight fashion they always tend to test the bottoms as well as the tops and for that matter the bottom at 6.5k has not been tested so could it be that the markets will break again and move down, lets keep our finger crossed and see what happens.

Inflating the Inflation, Deflating the Deflation

The Dow Jones Index which was close to 1000 in 1982, topped in 2007 at above 14000 i.e. it inflated 14 times in 28 years and in the current Depression (not yet official), has corrected about 50% and is currently trading close to 50% down from life time highs, Now the Brazilian Index Bovespa which was trading close to 5000 in 1994 topped out at 74000 in 2008 i.e. it inflated much faster than Dow Jones, but now it is currently trading near to 40000 after hitting 29000 in October i.e. it has not deflated as fast as Dow Jones, and still recently one Citigroup Analyst maintained a target of above 50,000 for Bovespa for year end and said that he would be buyer at 35000, All in all the analysts are fooling the world to believe that the inflated, ponzi scheme index called Bovespa is a buy, just like the S&P fooled the world by upgrading Bovespa as investment grade when it was trading at close to 72000, so that speculators could distribute there holdings.

Now let’s have a look at the Composition of Dow Jones and the Inflation, Deflation therein

Walmart which a penny stock and trading at 0.06 in 1972, had a lifetime high of close to 70 and almost giving returns like a ponzi scheme, was inflated more than 1000 times in just 36 years, the stock is currently trading close to 50 and is outperforming the Dow Jones Index.

Microsoft trading at 0.1 in 1986 hit a lifetime high of 60, It was a multibagger stock inflating more than 500 times in just 14 years

Similarly Mcdonald inflated from 0.3 in 1970’s to all time high of 60, inflating 200 times in just 36 years, HP inflated more than 500 times from 0.14 to above 77, Intel inflated more than 200 times from 0.35 to above 75 in just 14 years.

On the other hand Bank of America which inflated not more than 10 times from about 6.5 to 55 in 10 years is trading close to 4 after hitting 2.6 recently. Similar story could be said about Citigroup, JP Morgan, GM, GE, all this stocks are the ones who have beaten down hardly inspite of not inflating.

Now coming to my Indian Sensex, Leaving out the ponzi scheme Satyam which had inflated more than 500 times from 1994 to 2000, obviously on inflated earnings, and whose fraud came into light, The other Inflated Stocks Infosys, Reliance, Bharti Airtel, BHEL are still outperforming the Sensex.

Dow Jones Industrials 1929 Pattern

There are some patterns which almost all Major World Indices have followed in Bull Market has well as Bear Market, since my opinion is we are in a bear market lets elaborate on the patterns in Bear Market.

Pattern of US Dow Jones Industrial Average in the Biggest Bear Market ever, the era of Great Dep 1929 -
The Dow Jones topped out at 386 in Sep 1929, it is said that this was an era when everybody believed that markets are made to rise forever, be in the green always, never drop and go in the red. The bottom was at 41 in Jul 1932 breakdown of more than 80% in 3 yrs.
Now let’s look at the big downfalls, rallies and consolidation phases that happened in this bear market
The Dow Jones fell from 386 in Sep 1929 to 320 in Oct 1929 app 16.6% from the top which everyone might have thought is a correction to the major trend of the bull market, as the Dow Jones gave a pull back rally that took it at 359 (app 13.3%) within 14 days. The mother of all bear runs took over here wherein the Dow Jones dropped from 359 in Mid October to a low of 195 in Mid November a drop of app 45% within a month’s time frame. Again a pull back rally of somewhat less magnitude took the Index at 267 in Dec app 33.3% within a month. Consolidation Phase kicked in wherein the Index rallied upwards to 296 in April 1930 app 3% gain per month, downtrend followed immediately and the Dow Jones fell to 208 by June 1930 a drop of 88 points making app 30% drop in 2 months, consolidation phase emerged over yet again with the Dow Jones rallying to 248 in September app 7% gains per month. Downtrend took over and Dow Jones dropped to 154 in Dec 1930 a drop of app 40% in 3 months time frame. Pull back rally took the reins which saw the Index rally towards 197 in Feb 1931 averaging a return of 12% over 2 months. As usual Downtrend took over the proceedings and the index dropped to 120 in June again app 40% down from the previous top followed by a Pull Back Rally driving the Index towards 158 in June giving a return of 33% in 1 month time only. Consolidation Phase took over and with small ups and downs the Index remained at 140 in August after which a fresh downtrend bought it to 86 at the start of Oct and the downtrend too gave a negative return of 33% in 1 month time frame only. As Usual a pull back rally carried the Index to 120 in Nov again gains of 33% in one months timeframe only followed by a similar magnitude drop which bought the index to 70 in Jan 1931, Consolidation Phase took over and the Index was trading at 90 in March 1932. Final Blow saw the Index drop to 40 in July which was the low of the era.

Conclusions
1) The First big Downfall could be followed by a pull back rally of somewhat less magnitude as short covering and value buying pulls the Market up.
2) Bullish think tank is convinced that the storm is behind while the Bearish camp looks for opportunities to go short as consolidation reins.
3) Big expectations built up during the Bull Run which in reality are worth nothing pull the market even down.