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Could the Dow Jones Industrials (DJI) Be Poised to Break Out?   (November 2, 2006)


In my Oct. 21 entry The "Record" Dow Jones Industrials--A Clear-Eyed Look, I indicated that the new highs in the DJ-30 were rather suspect, as relatively few of the stocks had hit new highs. But if we look at a 10-year chart, another view emerges.

As long-time readers know, I believe the evidence suggests the bursting of the housing bubble has already mortally wounded the current run of U.S. "prosperity." But the stock market has often proved that it exists in a parallel universe with few ties to the "real economy." We may be in just such a disconnect.

In my Oct. 6 entry, Do Your Trust This market Rally?, I took a skeptical view of the current rally. But if we look with unprejudiced eyes at the chart below, we see a powerful uptrend in place:



Note that the DJ-30 has broken multiyear resistance and is rising above a multiyear channel. The uptrend since March 2003 is very much in place.

Am I still skeptical of the staying power of this rally? Yes. The wheels will fall off the economy at some point, perhaps as early as the first quarter of 2007, but in the meantime there are reasons to suspect the rally will extend beyond this week's retrenchment:

1. The vast majority of mid-term eelction years have experienced a Q4 rally.

2. Sentiment is now bearish/negative/skittish--the opposite of the euphoria/widespread bullishness which marks a market top.

3. With the housing and energy sectors in well-publicized declines, there is reason to believe money might continue flowing to the "safe" large-caps in the Dow and S&P 100.

4. If the "trend is your friend," there is reason to be on the long rather than short side of this chart.

5. Perhaps we are in an era analogous to 1973, when the DJ-30 shot up to a new high just before plunging into a grinding, multiyear Bear market. Take a look at this chart:



What powered the market to new highs in an era with so many warning signs of impending economic malaise? The same conditions which apply now: supreme complacency, momentum, wishful thinking, to name just a few. Will the market drop precipitously now that I have suggested it might make one more powerful lep upward? Possibly; but all we have in the way of predictive tools is factual displays of data, i.e. charts, so make of them what you will.


For more on this subject and a wide array of other topics, please visit my weblog.

                                                           


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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