Dow Target 6,617, October 25, 2009: Here Is Why

Includes: AMZN, DIA, DXD
by: Jason Tillberg

History may not repeat itself, but it does rhyme. I have been in the camp that this is a bear market rally. That is what I thought we would be getting in March. I'm also in the camp that because of the need to deleverage debt in most of the developed world, we will likely be heading into a global economic depression and perhaps at worse case, a collapse in the banking system.

I took a look at the bear market rally of 1930 and have found many similarities to our current bear market rally. Here is a chart from MSN money of the Dow Jones Industrial Average from November 1929 to October of 1932.

The Chart begins at the beginning of November, 1929, just before the bear market rally began. It began on November 12, 1929 and lasted until April 16th, 1930, for exactly 157 days. The rally had a gain of 42.85% from low to high.

Notice the RSI, which is on a daily format. It began at 20 in the beginning of the rally and went up to over 60 before pulling back a little and then heading over 70, at which point, it was overdone and ready for a pull back.

The pullback then lasted 81 days and experienced a decline of nearly 29%. This was from April 17th - June 24th of 1930. The chart shows the declines and rallies that occurred the following year and a half, at which point the Dow fell 89% from its peak.

Here is what the chart of our current bear market rally looks.
As I mentioned before, the bear market rally of 1930 lasted 157 days and had a gain of 42.85%. Our bear market rally today is now up for 152 days since bottoming on March 6th and has a gain of 44.07%.

What I'm finding very interesting and what also shows considerable similarity is the RSI. Here it again started at 20 in March and went up over 60 in May before pulling back in July and then running up over 70.

I nearly just repeated my observation of the RSI during the bear market rally of 1930. The duration and extent is also so very similar.

I can imagine back in March and April of 1930, the retail investors were beginning to call their brokers telling them to BUY BUY BUY, get me back in the market now that it's going up again. They wanted to make back what they lost in the initial crash.

Some notable quotes from those months include:

"The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."

- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

"... the outlook continues favorable..."

- Harvard Economic Society Mar 29, 1930

"... the outlook is favorable..."

- Harvard Economic Society Apr 19, 1930

This is nearly exactly what's happening today. Investors are calling their brokers or advisors and asking to get in and participate in this market rally. Money managers are sweating about missing the gains as well and might be buying for the sake of buying just to participate in case the market continues to rally.

In March, Federal Reserve Chairman Ben Bernanke suggested seeing green shoots right at the beginning of the market rally. In June, CNBC show host Dennis Kneale declared the recession is over. Let's be honest, our economy is getting worse and as far as waiting for the economy to come back, my question is "what economy?" The manufacturing company I used to work for as an Engineer that employed nearly 4000 American workers is gone. It went out of business in 2006 and its not coming back. America cannot compete with "Free Trade" and credit may not even be available to start up again.

I also believe earnings estimates are way too optimistic. Internet retailer Amazon (NASDAQ:AMZN) has annual earnings growth estimates of 22% for the next 5 years. How a retailer is going to grow earnings 22% over the next 5 years when unemployment continues to rise and incomes continue to fall is going to be a challange. The current share price puts AMZN's P/E at 56 making it quite expensive in my opinion.

There may be something about 4 - 5 months after a major low gets put in place that the retail investor gains the confidence to go back into the stock markets. AAII investor sentiment has 47% of their members bullish as of last Wednesday, which is the highest since this bear market rally began. Unfortunately, they are too late to the party in my opinion, just like they were in April of 1930.

If today happened to be the top of this bear market rally and history "rhymes" again, then 81 days from now, Oct. 25, 2009, the Dow would be 6,617 if it were to fall 29% from it's high it reached today at 9,321.

Disclosure: Short AMZN for clients and self and I own DXD for clients and self as a hedge in case this turns out to be right.