Is the DJIA Heading Towards Zero?

The Dow Jones Industrial Average has declined about 1,403 points over the last five trading days or nearly 13%. If the index continues to decline at this same pace, it will be at zero in about six weeks. I don' think so. The index fell 508 points on Tuesday. At this rate of decline, the index will be at zero in 19 days! The market seems disconnected from fundamentals and fear seems to have taken over.

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On the members section of The Kirk Report website, Charles Kirk noted all of the technical indicators from the SentimenTrader's roundup are flashing bullish. None are giving off bearish readings.

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Additionally, The Kirk Report highlights the oversold sectors from Bespoke. Charles notes that five sectors are trading with no stocks above their 50-day moving average as of October 7, 2008: Industrials, Energy, Health Care, Materials and Telecom. On October 3, 2008, Bespoke indicated there were three sectors that had no stocks trading above their 50-day moving average.

The economy and market are certainly challenged at the moment. However, the recent sell off seems to be extremely overdone. At a minimum, the market could be setting itself up for an oversold bounce.

Comments

[Respirate:]

"Is the DJIA Heading Towards Zero?" Toward? Well, yes, that's obviously the direction. How close it gets nobody knows. Fear, bordering on panic, has replaced fundamentals as the driver. It's amazing how far into the ground the financial system could be in such a short time. Looks like nobody knew what a house of cards we built.

2008 Oct 08 05:28 AM

[LariAnn:]

Fundamentals are going to be less important unless a company has low debt, is debt free, and/or has very low debt needs. All others are going to be pinched so hard that their fundamentals will suffer, causing further declines. What has begun is known in network parlance as a "cascade failure". A threshold is passed where when each segment collapses and the system tries to reroute, it causes yet another segment to collapse, then another, and so forth. Hold onto your butts, folks!

2008 Oct 08 09:54 AM

[Robert O'.:]

I have been surprised for a long time that the market has stayed high. I can see "Market Capitalization" as being a valid number for finding out how much it would take to buy control of a company. However, when I learned that companies include this number in their accounting, then I realized why it is so important to them to keep the share price increasing. They are using these imaginary numbers for getting financing. "Imaginary numbers" I say? Yes. Once an issue of stock is initially sold, the company has reaped all the benefit it is going to receive from it. After that, the share becomes nothing more than corporate "trading cards," and the value is simply what two "collectors" agree to.
What people refer to as 'market fundamentals' is fiction. That truth is finally coming to light.

Besides this, look back at the lessons learned from the crash of '29-'30, and you will see that the market has removed the safeguards. John McCain is right, that the chairman of the SEC should be fired. The SEC was established after the crash to prevent this type of activity, and should have prevented online trading and the wild, credit-based frenzy that drove prices to such high levels - just like the housing market. By the way, this president isn't the one to blame for the mortgage mess. Look back an administration to find those origins.

I expect that today will be a 1,000 point drop day. Why not? What changed? The interest rate? Was that what everyone was waiting for? Did that restore the liquidity levels the banks need in order to loan so much as a dollar? What is the REAL value of a share of ANY stock - even Berkshire/Hathaway (or perhaps ESPECIALLY that one)? Only what you can sell it for. That is the real market fundamental.

So, now what? Commodities, precious metals, and for those who want to really lead the way, semi-precious stones. Pricing on the diamond market is controlled, but not for semi-precious stones. They represent real value.

2008 Oct 08 11:11 AM

[carey_jim:]

I take the meaning of your post but in absolute terms, your math is wrong or else what you are saying is trivial (Whenever the DOW declines, it is always heading towards zero by definition!)

If the DOW starts at 10,000 and declines 13% a week for 52 straight weeks it will decline to 7 by the end of the year, which is not zero.

While I take your meaning, the DOW can only reach zero if the federal government decrees a halt to all trading, in perpetuity, and we all know THAT could never happen :)

(Maybe the market is trying to tell us something?)

2008 Oct 08 12:40 PM

[closedbooks:]

Can't the Dow add and subtract companies (e.g. Kraft for AIG) and keep things looking good?

2008 Oct 08 05:55 PM

[David I. Te...:]

carey_jim The title to my post on my blog is actually: Dow Jones Industrial Average Falls To Zero In Six Weeks?

2008 Oct 08 09:41 PM

[carey_jim:]

I'm just having fun David.

As I said, I take your meaning but even in a thousand years the DOW wont fall to zero, as long as people are allowed to trade that is.

(It might fall to one or two but not zero :)

If you take the advice of your great namesake, John Templeton, you'll make money even if the DOW falls to fifty cents!

And don't forget: In times of economic crisis, great fortunes are made (and lost.)

2008 Oct 10 12:45 AM

[David I. Te...:]

carey_jim: I agree with you that there is money to be made even in downward trending markets. Additionally, the market is not going to zero. I was attempting to add a little levity to this market situation. I think the selling is way over done and has been overtaken by emotion and not fundamentals.

2008 Oct 11 11:40 AM