Monday, March 30, 2009

DOW Update

Back on Mar 5th (DOW a historical perspective) I noted that the markets were becoming severely oversold, but stated that I still expected a test of the 6,400 level before finding support and then staging a rally to 8,000.


"with more bad news streaming in throughout the week, I anticipate we'll close lower next Friday than we did this last Friday and expect that we may even test the 6,400 levels throughout the week."

"I anticipate (based on oversold conditions/falling PPO and quickly approaching 1995 support levels) that we may see some further downside in the days ahead, but due to these same issues the DOW will likely find downside support soon and then it will follow up with a nice rally (8K) - before falling to new (significantly lower) depths."

Updated DOW Chart (from today) below:

If you noticed, four days after that March 5th post the DOW indeed did test the 6,400 level then followed it up with a huge rally - nearing 8K.

That rally however may now be close to an end... If you take a look at the green circled area, you will note that the Percentage Price Oscillator (PPO) lines have moved out of the oversold areas and the Black (shorter term) line is turning downward. If the black line crosses back through the red line, it will likely continue falling for a bit.

Also note that the Chaikin Money Flow (CMF)has shown a nice reversal and has pulled out of it's previous condition.

With all this said, the contentious G20 meetings start this week and various US economic data points/reports will be released throughout the week (e.g. Consumer confidence; ISM Index; Motor Vehicle Sales; Construction Spending; Factory Orders; And the Big Ones -- Jobless Claims and Employment situation). I anticipate many of these data points and the news from London to be bad - and with market oversold conditions now somewhat resolved, I expect the DOW (and other Major US indices) to close lower this Friday than they did today.

Just my 2cents - not investment advice




Willy2 said...

There's another bearish sign. And that's earnings for 2008 of the S&P 500. This is currently at approx. $ 27. The current P/E ratio is 787/27=29.

P/E ratio - S&P 500

15 - 405 (-48%)
7 - 189 (-76%)

(In the ealy 1980s the P/E ratio of the S&P was in the single digits).

Willy2 said...

There's another bearish sign. And that's earnings for 2008 of the S&P 500. This is currently at approx. $ 27. Source: The Big Picture. So, the current P/E ratio is 787/27=29.

P/E * Earnings = S&P 500

15 * 27 = 405 (down 48%)
7 * 27 = 189 (down 76%)

Let's assume earnings drop to $ 10

15 * 10 = 150 (down approx. 80%)
7 * 10 = 70 (down 90%)

Randy said...

Excellent point Willy2. I very much appreciate your contribution to this topic.

I also suggest readers take a look at the long-term trend line (on the second chart) at this link: Link

Can you see the potential for a DOW 2,000?

Willy2 said...

Of course, the DOW can go down to 2000. On average the S&P 500 is the DOW divided by 10. So, with earnings at $ 27 and a P/E ratio of 7 the S&P 500 will be at 189 (see my comments above) and this means that the DOW will/could go down to 1890 and that's a DOW below 2000.

Willy2 said...

Download this file. It contains a number of files which shed more light on the topic P/E ratios.
And it contains a graph which sheds more light on why the US economy is contracting. The US consumer no longer performs the "Shop until you drop" act.

jerry said...

When the unemployment figures come out expect a sell off. That seems to do it every time. That is the pie in face of investors.

Willy2 said...

In this PDF-file I have made an overview how earnings estimates have evolved since march 2007.

Out at the peak said...

Great call. Now that G20 has lost the momentum, the declines should start happening again.