Dow 20K

Someone needs to say this:

Dow 20K.

The fear mongers abound in the financial media.  TV and online ratings seem to go to those helping to peddle fear and sell gold or structured annuities (with high commissions attached).   Every individual investor I meet is scared silly.  They do not realize what is at stake.

For the mainstream media, it is all about ratings.  They have all learned that fear sells.  Attacking Obama, attacking Bernanke, attacking European leaders, explaining government policy as if it were the family budget ---  it all works.  The big-time media have garnered page views and sold papers.

Even when they attempt to show "balance" they have someone warning about Dow 5000 and the "bull" saying that stocks will go up 8% this year!  Is it any surprise that watchers are scared witless?

Investors need to understand that they are missing more than an 8% move.  Stocks will double.  When will they get on board?  Do they have a plan?

The Proposition

Let us attempt to restore some balance.

There is undue publicity given to Dow 5000.  A 50% decline has happened only twice in history.  The first time was in the Great Depression.  The second time was when people incorrectly believed that the fall of Lehman would lead to another depression.  As we now know, that was incorrect.  March, 2009 was a buying opportunity.  What about now?

Here is the proposition.

The Dow will double before it is cut in half.

I want to make this proposition right now, with the Dow around 10,000 and many forecasting 5000.  A prediction needs a time frame.  That is part of my current research.  For the moment, let me just say that it is shorter-- much shorter -- than most people would think.

The key point?  Most do not realize the cost of sitting out the return to normalcy of stock prices.

Obviously, this argument needs more evidence.  With the Dow crossing 10,000, today was the right day to start.

Comments

[oldprof]

Mark -- I don't know about the brain. One of those commenting at Seeking Alpha thinks I have been hitting the crack pipe!

Our short-term models are all out of the market. There is often a discrepancy between short-term trading and the longer time horizon.

A stock trade can be "correct" for both buyer and seller if it fits individual needs, risk tolerance, and system.

I did NOT write "Buy stocks now." I AM trying to get people to think about overall risk and reward in a balanced way.

If the article plants a germ of an idea for people, enough to get them paying attention, there will be time to buy.

Good question.

Jeff

[oldprof]

heywally -- There are a lot of ways to make money in the investment world. I think trading is great, as you know. I also think that the 200-day moving average is the most important single indicator, as I often note.

There will never be a time that is free of worry.

Thanks for taking the time to comment.

Jeff

[oldprof]

JohnF -- Fair enough. A key theme here is to monitor our economic predictions. It is fine to disagree.

Personally, I don't find "old time" comparisons very helpful. But I am curious. If you think that experience is relevant, why don't you have a little more confidence in Bernanke? Surely he knows about about the subject than we do, since it is an area of his specific expertise.

Just a thought...

Jeff

[Mark Hill]

Jeff,

Great ideas as usual. Your brain is bigger than a planet.

Your May 19 comment ..."We are currently short in our ETF programs, invested only in inverse ETF's."

It is a little rough to bury the little private investor for not buying stuff / selling stuff when you are short as GeorgeW?

And ... does the little guy really have to buy the market now ... couldn't he wait until things calm down a bit?

[Simit Patel]

as a previous commenter noted this is similar to the bounce off the 1929 crash. the catalyst for the resumption of the downtrend in the 30s was bank failure in europe. the catalyst catalyst for the resumption of the downtrend now is....

also, deflation is not bad. when was the last time consumption AND savings increased in the US? november 2008, in the wake of the october 2008 deflationary episode. deflation allows cash to strengthen and savings to be re-built while also enabling consumption to increase due to lower prices. savings are the foundation of any economy. the US is a country with a negative savings rate....

[heywally]

I look forward to the research; as long as corporate profitability remains in an uptrend, I will continue to patiently buy the dips, for short term trades. Given what's happened historically, I'm reluctant to "buy/hold" for extended periods, as long as we remain below the 200-day. I'm also wary of my fellow market participants, the Machines.

"One" of the other things that is always there and concerning, are Iran, Pakistan, the Koreas; geo-military danger, seemingly always sitting there on the back burner.

[JohnF]

I don't share the political agenda of those peddling the stories of debt/deflation. I'm just looking at the history of what happens when debt levels are so high, and echoes from the past suggest serious issues.

I don't recommend cutting the budget to the bone overnight and eliminating government.

I think we could have avoided much of this problem if policy makers had taken the Swedish solution to the banking problem. Sadly, we turned Japanese both here, China and Europe.

Obviously, we can rally hard during these periods, per parts of 1930 and 1932. But these are merely tradeable rallies.

In fact, looking back at 1932 the growth rates off the bottom were much better than the ones we're seeing.

I'm personally avoiding stocks, aside from trades, until they become cheap. We are so far from that...

It would take me a while to comment on modelling. I don't have much faith in most economic models...

[oldprof]

John F - One of the reasons to study quantitative methods, research design, and modeling is to escape reliance on the anecdote.

It is empowering. You can look at information far beyond your personal experience.

My conclusion will rest upon a wide range of research. Here I merely mentioned the historical odds.

As you know from past articles, I think that many people peddling the debt/deflation story have an overt political agenda. My own interest relates to investment success, not influencing voters in the next election.

I welcome your comment, and hope you will continue as this plays out.

Jeff

[Curtis]

Interesting, the DOW is one of the few indexes I pay the least attention too. Amateurs look for 'big baggers' and pay attention to the DOW level. You could be right. I'm on the inclination we are in a mutli-year range, that means a 50% upside potential or 50% downside potential too. But I don't have valuation models, as I assume you do.

[JohnF]

Possibly...but you may also be experiencing confirmation bias from only having seen stock prices recover easily from recessions.

To me, the numbers around the globe represent massive overborrowing leading to debt/deflation cycle of epic proportions. Debt/deflationary periods are typically long and harsh for stocks.

Sadly, our policy leaders have only made this worse by not properly recapitalizing banks. I am much more cautious.

Just looking at the other side of the coin, :-D