It’s been a month (December 20th) since the Dow Jones last closed at an all-time high. And since January 6th, the Dow Jones is finding breaking above its 20K line a hard nut to crack. That’s not to say the Dow Jones won’t see a 20,000 closing price. But the ball is on the bulls’ side of the court, and so far they’ve shown little excitement about doing what everyone is waiting for them to do; take the Dow Jones above 20K.
The longer they wait, the harder it will be for them to do it.It takes buying to make a market go up. But markets can go down on their own with no help at all.
Since early November, the bulls have had considerable success in moving the Dow Jones higher. Just days after the November Presidential election, trading volume for the thirty Dow stocks exploded. However, I have to wonder who is buying and selling these shares. Are we looking at real investment demand, or are the big Wall Street houses using their high-frequency trading programs to manipulate the market higher? It’s increasingly looking like the current advance in the stock market is something that Wall Street cooked up for the new sheriff in town; President Trump.
Look at the explosion in trading volume for the 30 Dow Jones companies since Trump won the November election (Red Plot chart below). With all that the Dow Jones still can’t break above 20K? I know what the problem is; when the Dow Jones is about to break above 20K, sellers come out of the woodwork to close out their position. For all too many; 20K in the Dow Jones looks like a top, or close enough for one to motivate them to sell and wait on the sideline to see what comes next.
Looking at the Dow Jones’ Bear’s Eye View (BEV) below, we see how closely the Dow’s BEV plot has hugged its BEV Zero line for over two months now. Although this happens, it can’t go on forever without the market seeing a correction.
When the inevitable market correction in the Dow Jones’ BEV chart above comes, assuming the December 20th all-time closing high of 19,974 still stands, the table below shows how far the Dow Jones must decline to break below the -2.5 to the -15% BEV lines above.
To see the Dow Jones correct 15% as it did in the summer of 2015, and again last January, it would have to decline just under 3000 points. Few people are thinking that today – but I am and then some.2017 still has eleven months in it. Lots of bad things can happen in eleven months.
Since the Greenspan Fed of the 1990s, trends in corporate earnings and share prices have been bolted together, where “market experts” analyze trends in earnings to predict future trends in share prices. However, before the Greenspan Fed, earnings had little to do with predicting price trends, and for good reason.
Below we see the Dow Jones from 1968 to 1984, a time when 1000 was the bulls’ line of death. Note how earnings were increasing the entire time, yet the Dow Jones couldn’t break above, and stay above 1000. That is until November 1982 when the Dow Jones finally broke above, and stayed above 1000 – while its earnings collapsed 93%. I know most people don’t know that, but it’s a historical fact.
Note too how the 1973-74 Dow Jones bear market (the first Dow Jones 40% market decline since 1942), took place as earning increased to new all-time highs during the entire decline. Go back and read Barron’s market commentary of the early 1970; you’ll discover that decades ago, market experts placed little emphasis on analyzing trends in earnings when discussing the stock market, for reasons that are painfully evident below.
The futility of studying earnings to predict future price trends was evident long before 1968. The 89% crash in the Dow Jones of 1929-32 began as earnings exploded 40% in the first nine months of the crash. The best year in the history of the Dow Jones took place from July 1932 to July 1933, where the Dow Jones increased 153% in twelve months as earnings for the Dow Jones were either collapsing or negative.
So how goes the Dow Jones’ earnings on the first day of the Trump Administration? After peaking in October 2014, they’ve declined about 19%, and as before Alan Greenspan became Fed Chairman, the bulls couldn’t care less.
Still, I expect that when “the big one” finally comes to Wall Street, Mr Bear will take the earnings for the Dow Jones down along with the Dow Jones itself. The simple reason for that is what we see for earnings in the post credit crisis period above is just too good to be true.It took twenty years for the Dow’s earnings to recover from the depressing 1930s, but only four years after the credit crisis?
