From one of our frequent readers. Couretsy Will Grommen.
After intensive consultation with his advisors, President Obama has decided to modify the formula used for calculating the Dow Jones Index. On January 1, 2013 the Dow Divisor will be changed to 30. The result of this change will be that the Dow Jones Index drops from the current 13,124 points to about 58 points. The underlying value of the 30 component stocks of course remains unchanged. With this modification to the formula Obama aims to make the large Dow fluctuations of recent decennia a thing of the past, and hopes that this will bring stability to the stock market. Banks, major investors and pension funds welcome this change in the Dow Jones Index formula.
To understand Obama’s proposal we must go back in Dow Jones history. The Dow was first published in 1896. The Dow was calculated by dividing the sum of the 12 component company stocks by 12:
Dow-index_1896 = (x1 + x2+ ……….+x12) / 12
Guest post by Doug Short.
Markets around the world rallied last week, or to put it more precisely, rallied in overdrive mode on Friday. France’s CAC 40, the top performer with a weekly gain of 3.42%, had a four-day loss of 1.27% at Thursday’s close. But the outcome of the eurozone summit sent buyers into a frenzy (with some significant short covering, I would imagine), and the index rose an eye-popping 4.75%. The German index exhibited the same behavior — down 1.81% for the week at the outset of Friday’s 4.33% advance.
China’s Shanghai Composite was the odd man out. It lost 1.57% for the week despite its 1.35% gain on Friday. The index is down 35.89% from its interim high in 2009. The signs of slowing economic growth have taken a toll on the Shanghai, and the Chinese Manufacturing PMI, due out later today, will probably influence the Monday’s markets in the People’s Republic.
The table inset in the chart below shows that four of the eight markets are in bear territory — the traditional designation for a 20% decline from an interim high, down from five last week with the German index rising above the bear stigma. In our gang of eight, the S&P 500 remains the closest to an interim new high, down only 4.01% from its April 2nd peak.
Guest post by Doug Short.
Here is the latest look at the “Sweet Sixteen” Dow recoveries adjusted for inflation/deflation I’ve been illustrating from time to time over the past three years. The charts below compare the current Dow recovery since the March 2009 low with fifteen other major recoveries dating from the origin of this legendary index in 1896. (See the footnote for my selection criteria.)
At this point the Dow is 816 market days beyond the 2009 low. The index has slipped to fifth place in our Sweet Sixteen competition with a real gain of 70.6% off the low. On our last check, on April 23rd, the real Dow was up 83.2% and was in fourth place. The latest close is a nominal gain of 85.1% since the 2009 trough (the interim high being 102.6% on April 2nd). However, since we’re comparing such a diverse set of market eras with such a wide patterns of inflation/deflation, the real numbers provide greater comparative insights.
With economic & political problems spreading rapidly around the world and – importantly –an accompanying negative price trend, the mood in the speculative markets has darkened rather suddenly (and – for us at least – rather amusingly). Just two short months ago, the S&P 500 had enjoyed a 37% gain over 10 months, and – with the consensus’ seeming tendency to extrapolate the recent past into the future - sentiment towards stocks, commodities, non-government debt & ‘risk’ currencies had become fiercely bullish. By that time, the contempt bestowed upon the steadfast bears was onerous; in short, being bearish was well and truly out-of-style.So, as ever, the market proceeded in the least appetising direction so that the greatest pain could be imparted upon the greatest number of speculators. After about a month’s worth of technical divergences, the major US equity indices and commodities topped out on May 2ndand have subsequently proceeded lower ever since (i.e. with lower short-term lows & lower short-term highs).
Remember the old man, Joe Granville? In March he predicted the Dow would fall 4000 points in 2012. People laughed at him back then…
Volume precedes price. It sure is happening in Spain, Italy, Eurostoxx and other indices. Has the time come to the US markets?
Repeat after me; volume precedes price.
People laughed at Joe Granville some weeks ago when he perdicted the DOW would fall 4000 points this year. Then, all of a sudden, markets sold off hard, while volume and vol exploded. The buy the dip investors are still trying to buy the dip, but this bounce is losing steam. Silver is currently reversing the move, and about to enter negative territory on the day. Let’s see if all markets reverse down today. Meanwhile, time to review what Joe Granville actually said a few weeks ago. Video below:
Interesting chart and observation on the long term Dow chart. With the LTRO out, maybe it is finally time to sell the news….. Courtesy Jesse’s Café.
A failure in this broadening top could, if activated, take the DJIA down closer to the bottom of the long term logarithmic trading channel.
The Federal Reserve will do all it can in order to create liquidity to prevent this sort of major market crash.
I can also that resulting in a sideways market, within a fairly broad range of 7,000 to 15,000 on this log chart, until 2020, as we see happened in the 1970′s after the 1960′s stock bull market. That also fits well with the stagflation forecast.
As a reminder, when looking at a very long term chart like this it is important to remember that it is not adjusted for inflation.
However this all works out in nominal terms, the Dow/Gold ratio is likely to touch the 1.5 or lower level at some point in the next eight years. Charts below.
“There are two things infinite, the universe, and people’s stupidity”-Einstein. The markets have been grinding higher this year on very light volume. Volatility has collapsed. People have been acting in an inverse panic mood, ie people are most afraid of missing out on the move up, and have forgotten about hedging. We posted a great commentary by Hussman Funds on the drawdown yesterday.
Yesterday we also got that “famous” call from a contra indicator. “This market is going to 1500, the Economy is doing well”.
These are all classical psychological inflection points, where people’s minds start neglecting risks, and the group sees only opportunity of rising markets. Joining the bull camp over the past days and weeks, is media. We are once again hearing of green shoots, goldilocks, Dow 15 000 imminent etc. Whatever people tell you, this time is not different, as many have positions, but they don’t have a clue why they have them. Further insight on media, psychology and markets by Lance Roberts via D Short.