When Will the Dow Jones Reach a Bottom?

After the last two days of trading, the Dow Jones Industrial Average and Dow Jones Transportation Average have resoundingly confirmed the direction of the market. The Industrials fell below 8175.77 and the Transports fell below 3364.98. The strong volume during the last two days added support to the move downward. On November 20, 2008, my index of high quality dividend stocks registered 94 new lows as compared with the previous record low of 100 on October 9, 2008. This means that although the market has been gutted the last couple of days, we're not at a long term bottom.

Another factor that is of concern for this market is that the Dow Industrials broke through its 4% yield to finish Thursday November 20th at a yield of 4.12%. We can only guess that the Dow is headed to a yield of 5% or a closing price of 6226.

As I mentioned in my October 24th posting, there was a considerable gap between the amount that the Industrials and the Transports needed to fall in order for both indices to hit their respective lows of 2002 and 2003. While most market technicians are looking strictly at the Industrials and the fact that the low of 2002 has been reached, I am concerned about the Transports. The Transports are still 32% off of the 2003 low. At the current rate, the Industrials would have to fall an additional 2,748 points in order to accommodate the Transports going back to the low of 2003. This would bring the Dow to a level of 4804.29. Let's hope the Transports don't need to back fill in order for the overall market to go higher.

Unfortunately, we're within 4.70% of my September 17th Dow Theory calculations of 7197.60 for the Industrials. At the time, the Dow closed at 10,609.66. What is more unfortunate is the fact that conditions seem to be deteriorating in the banking system. It is my fear that Citigroup (C) or Bank of America (BAC) will have to be merged with any one of the other top ten banks simply because the government will not have the resources to bail out the situation.

Furthermore, we might be forced to have direct bailout money coming from a foreign nation to try to rescue our banking system. The need for foreign intervention (possibly from China or Japan) might be the catalyst that sets the dollar into a tailspin and pushes up the price of gold (but I digress). Evolving problems with the banking system make sustained movements higher very difficult. After a loss of 47% in the Dow Industrials, it is hard for me to believe that the markets can go any lower. However, we need to prepare ourselves for the worst and hope for the best.

Declines of the current market are usually followed by violent moves to the upside. Remain cautious of days when a stock index goes up 5% or more. The new upside targets for the Dow Industrials are:

• 10,858.41
• 9,625.28
• 8,378.95

The 10,858.41 figure is the halfway point from the peak at 14,164.53 based on the November 20th closing price of 7552.29. According to Dow's Theory, a decline is usually followed by an increase which, if extending beyond half of the decline, could indicate that a new bull market is in the making. As long as both the Industrials and Transports accomplish this movement together (but not necessarily at the same time), the 9,625.28 and 8,378.95 levels are strictly technical in nature and could easily be violated in a bear market rally.

Comments

[Steven Hansen:]

strictly from an economics point of view, the transports are healthier as a group during this downturn - and have higher utilization rates than the dow as a whole.

2008 Nov 23 07:58 PM

[bearfund:]

Priced in dollars, the bottom can't be too far off. Probably no more than a few months and at most another 10 or 20%. In real terms, however, there may not be a bottom at all. Ask the Japanese.

2008 Nov 24 12:49 AM

[Mr. Boater:]

A "temporary" bottom may be found for a short while before continuing to the bottom of 4000-5000.

The next downdraft--I call it Real Estate Crash 2, will start slowly in May 2009 and continue till mid year 2012. Possible the markets will try for a bottom early 2012 in anticipation of the end of the RE collapse.

The subprime mess was caused by 615 billion in loans buried in derivatives--I am guessing about 20-25% of those loans went bad. Many of those people are trying desperately to keep their homes.

The next session will incorporate 1.1 trillion of option and interest only ARMS held by thinly capitalized speculators who got in too late and got trapped in upside down loans. They are screwed. I think over 50% of these loans and their derivatives will go bad--2009-2011 will be very bad years for the housing market, labor, and the consumer. I see gold and the Dow meeting at 4000-5000, Bonds will be crushed.

2008 Nov 24 10:13 PM