In August 2013 I posted an article with long term price projections for the Dow Industrials based on a remarkable price symmetry since the 1932 depression lows: The case for Dow 32000
The article called for a major peak near 32000 or 19410 by late 2016 or early 2017. So here we are in late 2016 and the Dow has just reached that minimum target of 19400 last week. This is the perfect time to update those projection charts and have a little look what could be up next.
In my article I mentioned 3 conditions that would need to be met for the Dow 32k scenario to remain in play. The market was just having a bit of a pullback after climbing above 15k for the first time, and there was plenty of talk that the top was in and the market would crash. This were the 3 conditions:
1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.
The first condition was met easily as the pullback was short and shallow with a bottom near 14700 before climbing to new records in 2014 and 2015.
The third condition was also met as the Dow nicely climbed above 17000 in the summer of 2014.
But the second condition, leaving the green overhead resistance behind, did not pan out as can be seen in this chart:
And that’s how we did not get to 32k, but we have reached the lower peak target of 19400. Does that mean the top is now in and we can bet on a crash? Well, not so quick. The possibility exists that the market is starting its final ascent and may reach the 30k-32k in an 8 to 12 month blow-off peak. We still don’t see massive investor euphoria and if the Dow climbs to the upper bound of its trend channel since the 2009 lows (dashed grey lines) then it could get there. The pink ellipse shows the projected target area in this scenario.
I will go to S&P 500 charts to study how such a final surge might play out. This is the current situation with major trend lines drawn in:
The S&P is clearing one of the last overhead hurdles near 2250 (green line) and if it decisively breaks through that level then the door will be open for a climb to the upper bound of its trend channel since 2009 (blue lines). In fact, neither the Brexit nor the US election fears pulled the market back to the lower trend long term trend line (blue), which supports the case for such a surge. The S&P is already following a steeper rate of advance (given by the dashed grey line) since early 2016. If it keeps this up for another 8 to 12 months the S&P will be in the 2600-3000 zone. This is the same rate of change it kept going for more than 3 years in 2012-14. If it keeps it up for another year then the S&P would be in the 3000-3200 area. Both target zones are shown with pink circles in the chart and appear doable.
This analysis helps us to see what it will take for this scenario to stay on the table. S&P will need to break above the green line quickly and then go on to 2500-2600 fairly soon, probably before summer 2017. Then a final autumn autumn moonshot could take it to near 3000, which would become an obvious attractor at some point.
We can also see what would invalidate this setup. Any decline below 2000 in 2017 would tell us the long term advance since 2009 has ended and that would definitely take the quick surge scenario off the table. Any sustained drop below the dashed grey line, currently near 2100, would already suggest this scenario is not making it. So, that are the lines in the sand that I am going to watch carefully.
If we do get a surge to 2600+ next year then it is likely to be followed by a steep decline in 2018-21. This is what would become my base scenario after such a blow-off peak:
Major long term support will be in the 1500-1700 area in the early 2020s, so that would become an important target if there is a crash or bear market.
What are the odds of this coming true? I think there is currently about 20% chance to get this kind of runaway market in 2017, and the odds would go to 40% if the S&P gets above 2300 quickly and keeps climbing in January – February.
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Let’s finish with a look at the shorter term Nasdaq chart:
New records with the Nasdaq breaking above 5400 after earlier hesitation at that level. All indicators are pointing up with further room to rise. No signs of a peak. All we can do is go with the flow.
Updated long term scenarios and charts.
Posted by Danny on January 23, 2018
Time constraints have kept me from blogging frequently in recent months. Today I will do some catching up by reviewing the long term scenarios and indications we have been covering.
Long term readers will remember my Dow 32000 series, which I started sharing in 2013: The case for Dow 32000. Many people declared me crazy, because the Dow was still below 15k and the internet was full with bubble and crash warnings. The Dow is now above 26k and the forecast doesn’t look all that crazy anymore. Meanwhile some of my colleagues are still peddling bubble and crash warnings. I am sure they will be right some day, just like you will inevitable be right eventually if you keep calling for rain on blue sky days. But investing is about making money, not about being right eventually.
So first off, here is the updated version of my long term monthly chart from December 2016 ( see: Dow 32000 revisited):
No need to change anything here. The market has kept rising along the dashed grey line as expected and ended 2017 right into the first pink target ellipse. The move may be near its end, but the odds for an extension into the second pink target ellipse (around autumn 2018) are going up. The reason is that real volatility has stayed so low, and normally you get higher volatility in the final stages of a big move (more on that below). If the S$P 500 goes on for another 8 months and gets in the 3000+ zone then the Dow will also be near to our 32000 mark. A drop below the grey dashed line would tell us the bull market since 2009 is probably over.
Some readers have been pointing out that my 88.4y cycle is due for its peak. That’s true, but a cycle that has been observed only a few times is hardly a hypothesis, not a very reliable indication. We will need a few thousand years of stock market history before we can tell if that cycle shows up with any regularity. Also a cycle of that length should not be expected to work perfect to the month. If the bull market peaks next September it would still be a good match for this 88.4y cycle.
The solar Saros 127 will revisit us in 2019. This Saros has marked both the 1929 crash and 2001 crash (and 9/11). See: The Saros cycle and the stock market. So, it is quite possible this bull market will stretch into 2019 under increasing volatility.
There are two reasons why the odds for another year of bull market are pretty good. As I wrote in February and March 2017, a dearth of 1% down days in the S&P 500 has historically been a bullish omen for the next 12 months. Very low volatility tends to mark the middle of big moves, not the end of them. See: We got a 1% down day, what next? A 109 day period without 1% down days had just ended, but we are already in a new one, now at 107 days and counting. So here is the updated list:
Once the current series without 1% down days ends we can expect the market to climb an average 14.8% over the ensuing year (if historic tendency keeps up). That would mean S&P 500 well above 3000 in early 2019.
We are also on an extremely long streak without 2% down week, as explained in this article from last July: Why the VIX is so low and why you shouldn’t worry about it yet. We still haven’t seen a 2% down week since I wrote that article and the current streak is up to 71 weeks. We have to go back to the roaring and 50s and 60s to find longer periods of “painless investing”. Here is the updated list:
Twenty more weeks and we would break the record from 1959. More important is what happens after the first 2% down weeks that comes. It will panic investors for sure. But again the historic average shows us that the market tends to rise another 10% in the 12 months after that first 2% down week that ends a long period of “painless investing”.
So, that’s where we stand right now. Could it be that historic tendencies will fail here and the market will suddenly crash without giving any advance warning in the form of increasing volatility? Of course, that could happen. Nothing can be ruled out. Just know that the odds are not in favor of it, if history is any indication. That’s also why VIX stays so low. Once we start getting more 1% down days and more 2% down weeks we will know that volatility is increasing and then I would expect the VIX to go up even though the S&P 500 may still be setting new all time highs. That would be a clear indication that the bull market is on its last legs. Until then I would just go along with the flow, with normal levels of caution.
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Posted in Market Commentary | Tagged: 1% down days, 2% down weeks, Dow 32000, VIX, volatility | 4 Comments »