Broad Oak: your emotional support animal

Friday, June 27, 2008

Dow Jones - worse bubble than the FTSE?

Just out of interest, I thought I'd do the same trend-spotting exercise for the Dow Jones as I did yesterday for the FTSE, i.e. extrapolating the highs and lows in the late 80s and early 90s.

The results are very different. October 2007 saw the Dow's highest-ever peak, and today, after falling over 2,000 points from that point, it still stands about where it was in the tech bubble of December 2000 (see yellow line).

And my hi-lo wedge (red lines) suggest that the Dow has been seriously above trend for most of the last 11 years. Of course, you can draw lines however you like, but I'm trying to do approximately the same as for the FTSE and the implication is that the Dow "ought" to be between 7,000 - 10,000, centring around the 8,500 mark. This chimes with what Robert McHugh predicted last year (9,000). (If you draw the "high" line to connect the '87 and '94 peaks, the hi-lo lines converge towards 7,000!)

I wonder what's keeping it up?


Anonymous said...

How does the graph change isf correcteed for "inflation", that is, does the recent accelertion in "inflation" bring the Dow chart into a more "normal" zone??

Thanks for any thoughts.....


I guess it depends what you think represents the long-term trend - hard to spot with such volatility. If you look at iTulip, their very long-term graph of Dow vs inflation suggests the Dow is massively above trend and has been so since the later 90s. That graph suggests the Dow could drop 50% and still not quite reach the red line representing real (post inflation) long-term returns.

And then there's the question of long-term cycles - Kondratieff and latterly Fischer ("The Great Wave") - there could be changes on a scale that we haven't seen in a lifetime. Plus the globalization of the world's economies have changed the game completely - Marc Faber says we could be facing the first global as opposed to regional, bust. We live in most uncertain times.