# Where Is the Dow Going Now?

On September 17, 2008, when the Dow Jones Industrial Average closed at 10,609.66, I stated:

“If falling below the 9,531.11 level, the Dow will go to the 7,197.60 level.”

Monday the Dow Jones Industrial Average closed at 7114.78. The question now becomes, “under what premise did I arrive at the 7197.60 target level?” I came to this conclusion using Dow’s Theory from the intraday low in the Dow during October 10, 2002 and the Dow intraday high on October 11, 2007. The following are the downside targets based on this timeframe:

• 11,913.80
• 9,547.64
• 7181.48

Because Dow’s theory indicates that there are three legs to every bull or bear market, I consider the period from 2002 to 2007 as the third and final phase of the bull market from 1974 to 2007. The Dow Theory target levels using the 1974-2007 date range are as follows:

• 9709.98
• 5140.00
• 570.02

As I’ve mentioned before on my blog, if the Dow cannot hold above Monday’s closing price then the Dow is going to the 4132.17 level. This figure is based on taking the dividend payment low of \$95.18 for the Dow from 1991 to the high of \$324.31 in 2008. The difference of these two figures is \$229.13. From this we can apply Dow’s Theory to show us where the dividend payment might fall to. Using the adjusted dividend payment and multiplying that amount by a dividend yield of 6% tells us the traditional level at which the Dow is historically considered undervalued. The following are the downside targets applied to the dividend payment:

• 4132.17
• 2859.16
• 1273

What are the benefits of these different perspectives on the market? First, we assume the very worst that the market can throw at us. Second, we get to determine which market action is truly in force. Third, we get the chance to make decisions of what to do with our money without being blindsided.

My favorite approach of the three is the one based on the expectation of reduced dividend payments in the future. After all, Dow components like Citigroup (NYSE:C), Bank of America (NYSE:BAC), General Motors (NYSE:GM), General Electric (NYSE:GE), Alcoa (NYSE:AA), and JP Morgan (NYSE:JPM) cannot pay dividends in this environment. Soon, the remaining Dow Industrials like Intel (NASDAQ:INTC), and Pfizer (NYSE:PFE) will have to keep their dividend the same or reduce the amount of their payment.

When I did a study of the period of 1921 to 1933, I found that the Dow had an increase of its dividend payment by 228.20%. In the period from 1991 to 2008 the Dow dividend payment increased 240.07%. When Dow’s Theory is applied to the ’21 to ’33 period, based on the dividend payment from the 1929 peak, the Dow would have theoretically hit bottom at 64.83. In reality, the Dow closed at 40.56. This makes the 1,273 level seem like a reasonable level based on further reductions in the dividend payments on the Dow similar to the period from 1929 to 1933.

To be realistic, we have to set upside targets just in case this is actually the bottom (for now.) Based on Dow’s Theory, the next upside target for the Dow Jones Industrial Average is 9034.69. The Transports would have to confirm this trend by rising to the 3717.26 level.

Don’t be fooled by the outrageous thought of a Dow 1,273 or Dow 570.02. When compared to the Nikkei 225 index this seems very possible. Although many think that there is no comparison between the Japanese economy and the U.S. economy, politicians prove that nothing can be achieved when they are a part of the process, thereby justifying the need for their (dis)services.