Is the Dow's Worst Yet to Come?

Markets around the world are feeling the pain of the credit crisis and the current recession. The Nikkei started its trading day Thursday down more than 7% ending down 2.5%. Not to mention that the Hang Seng index was down 4.2%, the S&P/ASX 200 was down 4.4%, and the Kospi was down 7.5%.

Today, it’s the same story for those markets.

• Nikkei down 9.6%
• Kospi down 11%
• MSCI Asia Pacific down 5.6%
• MSCI’s Asian Index down 8%
• FTSE 100 down 5.6%
• DAX down 5.1%

All of these indices are hitting record lows: prices set five year ago to prices set at their inceptions in most cases.

It is a fact that the global markets are interconnected.

The U.S. was the start of the housing and credit crises; however, it is currently rippling throughout the world. These foreign indices listed above are all starting to feel the pain of this global credit crisis as they are the tail wag to the dog. Does this mean that the foreign markets will recover last at the end of this recession? Perhaps – but this new global market is creating a cause for global initiatives. The Economic Summit meetings are filling up the agenda of world leaders as everyone attempts to find a solution to stave off the impacts of the worldwide recession and to prevent a global depression.

Not until the past two weeks have many people realized that this recession is affecting other countries and many still do not realize that the global outlook into late next year will be worse than expected. The U.S. market has not found its bottom at the low 8,000 levels. In my first article I wrote of the days ahead and how the first “-777 point day was the first of many similar days” and that days was “plural.” Since then, we have seen a continuous tug-o-war in the market, where each “pull” at the market has been triple digits. Expect the move that finds the bottom of this market to be large.

Many investors have been cheerleading stocks across the board that they are a buy – from a valuation standpoint – and yes, many stocks look appealing for long term investment since most major large cap stocks on the major indices currently have P/E ratios less than 10 on average and stock prices that are misrepresented by the oversold market, creating value in the long term. However, two factors are attributed to the high volatility creating 25 out of the last 27 session closes to be a result of triple digit movement.

The first – and fundamental – reason is that investors are confused where to value companies, now that the markets have fallen so sharply and consequently becoming way oversold. This creates a large range of prices for stocks across the board at which to be valued/bought and that is reducing confidence in the market as well as the prices. The day the markets have their strong rally will be a result of most investors buying into the market simultaneously and sequentially.

Another point related to fundamentals that I want to make about the rapid unpredictable movements in the market is the confusion between investors and analysts. The market has been falling so quickly over the past few weeks that many large corporations with low P/Es and other fundamental elements that point to growth and value have not been adjusted by analysts. This gap in communication creates a difference between actual value and where investors are guessing company stock prices; and until this issue is solved, the market will continue to move quickly and far on record high volatility.

The second – and technical – reason is that every stock, commodity, currency, index, etc. is currently poised at record and multi-year lows which are attracting many investors – institutional and individual – because of the long term value. Many day traders are taking advantage of record volatility and weakness in the markets.

In my last article, I also mentioned where I believed the DJIA was headed. I said that the DJIA was more than likely to fall through the 100 day moving average (MA) than bounce off of it, and that if it did break through that it would fall to the 200 day MA (which it did).

Let’s look at an updated chart of the DJIA from a chartist’s view:

This is a representation of the DJIA over 10 years from a monthly perspective. The stock is sitting just positioned on the 200 day MA – as stated in my previous article. Will this level hold? Only time will tell, but expect the volatility to continue as we search for a bottom. I would watch the market carefully to look for signs of this short term rally during the remainder of this week and into next week.

Here is another chart of the DJIA taken from a daily view of 100 days:

The symmetric triangle we’ve seen form over the past few days finally broke to the downside recently. This may not mean much too fundamental investors, but with regards to the short-term trend, this is somewhat bearish. That 8,000 point level is not very far away.

However, the DJIA is sitting on significant support currently; and therefore, I want to restate that the moves in the market during the next few days must be carefully watched because regardless of the direction, I believe the move will be significant to say the least.

The above analysis mainly pertains to shorter term trends. The long term trend is still down.

Comments

[raising4dau...:]

Long-term trend is still down? Define long-term? Truly long-term charts (70 years) show a long-term trend value for the Dow between 8,000 and 9,000. We're there. The problem now is fundamentals of the global economy. I'm not disagreeing that we'll go lower, but this market has become very "investable" for those with a 10 year horizon.

2008 Oct 26 10:51 AM

[Griz:]

In 1930, after already losing 35% of it's value, many pundits were commenting on the Dow saying: "but this market has become very "investable" for those with a 10 year horizon"; the Dow promptly lost 80% of it's value from that point as it sank to it's depths of June 1932...

2008 Oct 26 11:15 AM

[salexpo:]

The 200 dma is way higher, around 12000. What are you talking about ?

2008 Oct 26 12:28 PM

[Andy Cole:]

He's using a monthly chart. Thus, the different calculation of the 200-day MA.

2008 Oct 26 09:04 PM

[Smarty_Pants:]

Then it would be a 200 MONTH

2008 Oct 26 09:06 PM

[Smarty_Pants:]

Then it would be a 200 MONTH MA, not a 200 day MA.

Semantic difference but an important one.

2008 Oct 26 09:07 PM

[Andy Cole:]

Typo, but yes, you are correct.

2008 Oct 26 10:58 PM

[John Lounsbury:]

The question of value is not confused by poor analyst communication as much as by lack of visibility for earnings and lack of transparancy for balance sheet assets. The analysts can effectively communicate conlusions (recommendations) when there is so much uncertainty about the facts and assumptions.

Technical analysis is very useful. despite the mislabeling of the units for the MA.

2008 Oct 27 09:56 AM

[xsuddensam:]

In light of all the uncertainty, I would think that the prudent course of action would be to sit it out in cash. The trillions of dollars in the murky CDS market could be the next shoe to drop. A troubling sign is the current talk of the government providing liquidity to the insurance industry which may have its fingers in credit default swaps.

Commercial real estate loan defaults are also a serious consideration. Drive around your town or city and count the number of new commercial for lease signs. Where I live, long established furniture dealers, restaurants and other small businesses are closing. The number of vacancies in your local mall will give you a good idea of how the local economy is doing.

Relying on charts for a signal to jump into the market is not real smart since it's the economy which ultimately drives the stock market.

2008 Oct 27 11:49 AM

[parky:]

Holy crap! After reading all the negatives and thinking about the probable results of the coming election, I think we're about to hit the tipping point.

I was born in the middle of the last depression and remember my father talking about butter at 5 cents a pound and bread a t10 cents a loaf.

WWII brought us out of the depression but the price was 50 million people world wide dead from 1939 to 1945. Quite a price.

2008 Oct 27 11:14 PM