HAS THE DOW SEVERELY CORRECTED ALREADY?
by Sol Palha
September 17, 2006
Say oh wise man
how you have come to such knowledge?
Because I was never ashamed to confess my ignorance and ask
Johann Gottfried Von Herder 1744-1803,
German Critic and Poet
decided apply the simple concept of pricing the Dow in Gold
and Silver in the same way we did in an article titled
Dow 1200 Illusion or?
take the low of the Dow in the last 4 years and the low that
gold put in the last 4 years. As the Dow is priced in
Dollars we will divide the price of gold into the Dow. For
the record we could choose other price points as they only
serve to illustrate our point.
2002 the Dow was trading at 7200 (4 year chart) and Gold was
trading roughly around 300.
divide 7200 by 300 (the price of Gold), we get 24 ounces.
Now it took 24 ounces of Gold to buy the Dow back in Oct
2002 (remember we taking the Dowís lows into consideration
and not itís highs) so it should take at least 24 ounces or
more to buy the Dow today. Letís check that figure out.
of this year the Dow put in a new 52 week high and almost
tested its old all time high of roughly 11700. For arguments
sake we will assume that the Dow traded to 11700 in May. At
that time Gold put in a high of roughly 720.
divide by 720 = 16.25
0ct 02 it took 24 ounces to buy the Dow and at this time it
was trading at a 4 year low. This means that the Dow was
actually trading higher back in Oct 2002 then it was today
because today it takes 8 ounces less of Gold to buy the Dow
when itís trading at close to a new 5 year high. For the Dow
just to break even to its Oct 2002 levels it would have to
be at (24 X 720) 17280.
only made it to 11700 so far. That mean the Dow has
corrected over 35% as it should actually be at 17280 instead
itís below 11700. Market technicians state that we are in a
bear market if the market has corrected over 20%. Based on
these figures we have corrected over 35% yet the Dow has
just put in a series of new illusory 52 week highs. Hence in
reality the market could technically rally a lot more and
still be in a bear market. The funny part is that the bears
are actually right but they just donít know how to use this
info and the bulls are actually wrong but they happen to
using the info for the time being in the right manner.
use Silver as the constant the figure we get is even more
outrageous and it suggests that the markets have corrected
even more then 35%.
was trading around the 5.15 mark in Oct 2002.
7200 divided by 5.15 = 1398 ounces
Silver traded roughly to 15 dollars
15= 20970; thatís the level the Dow should be just to equal
the level it was trading in Oct 2002 when priced in silver.
means that the Dow has already corrected a whopping 44.2%
and yet it has put in a series of new 52 week highs. These
highs are all illusory in nature.
the Dow is priced in dollars lets perform a final test on
the Dow. The Dow hit an all time high back in 2000 (look at
picture below). To simplify matters lets assume the value of
this high was 11700 (actually itís higher).
letís look at what the dollar was doing in the same time
period. At the time the Dow put in its all time high the
dollar index was trading around 105; this is roughly 20
points (currently in the 85 ranges) lower then where itís
trading right now. On a % basis it works out to 19.5%. To
make things simple we will round it of to 20. That means the
in todayís dollars the Dow would have to trade 20% higher
then the high it put back in 2000 just to break even. At
this point in time the chances of the Dow trading to the
14040 price point level are slim to none. If we were wildly
optimistic we would probably issue a target of 12600 at the
most; for the record we are not wildly optimistic at this
point in time.
yet another completely out of the box way of examining the
markets and what they are doing. This viewpoint provides yet
another valid reason to support our bullish out look on the
intermediate time frames. We are still bearish when taking
the long term view, however a lot can happen between the
short, intermediate and long term time frames. If you are
not properly positioned you could end up bankrupt while
actually being right.
could technically state that the market is simply
experiencing a long dead catís bounce or that we are in a
long term bear that is truly invisible for the time being.
In the end one must understand that when one is dealing with
the markets that nothing remains the same forever; those who
examine the markets with closed eyes and a closed mindset
will find that their wallets enter into the empty zone
rather fast. This little exercise also very clearly
illustrates the evils of inflation.
Since we can't
know what knowledge will be most needed in the future, it is
senseless to try to teach it in advance. Instead, we should
try to turn out people who love learning so much and learn
so well that they will be able to learn whatever needs to be
learned. John Holt 1908-1967,
Australian Politician, Prime Minister
remember we are just offering another possible way of
looking at the Dow. Do not simply jump on the super bullish
bandwagon and assume that the Dow is going to keep soaring
were provided courtesy of