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LOOK REPORT #8: Dow Jones Industrial Index Background: Quick Look Reports will look at a possible dominant trend in an Index, Equity or Commodity and some possible long-term (yearly) trends which could emerge from the dominant cycle(s) (the datasets will be weekly or monthly with the shortest cycle about 7 to 15 weeks). Quick Look Report # 8 looks at an update to the weekly prices of the Dow Jones Industrial Index (Weekly) from 1918. The primary seven weekly cycles in the NYSE Index are: 69, 109, 176, 333, 233, 510 and 1900-weeks (looks similar to S&P 500 and NYSE Weekly Indices). There are seven smaller weekly cycles at 7, 9, 15, 18, 28, 40 and 52-week cycles. These cycles represent an approximate (within 10%) fit to the amplitude/phasing of the long term weekly DJIA Weekly Index from 1918 thru Aug 2005. Prior predictions of the DJIA Composite Weekly have been issued in the past 15 months (see FSU Archives Rinehart on Magnificent Seven). This type of cycle analysis may provide a sneak peek into what is coming for 2006-2008. In particular, it does not matter what happens in the short term (less than 28 weeks) since it has no real significance in terms of the long term waveform in the DJIA but would be important for short term traders. In fact, it appears the seven smaller cycles are “trading cycles” for the floor specialists (since the sum of these cycles approaches a zero mean periodically) and the seven long term cycles are the primary frequencies of the World’s Central Banks (et al). This study includes the largest cycle in the DJIA Index weekly closings (i.e., including the 1900-week or 38-year cycle assuming it exists). It is believed this cycle has formed a top (2002-2003) and is a major component of a coming secular bear move down which will take years to complete. When this cycle starts accelerating downwards significantly (after June 2007) it is predicted to take the DJIA Weekly Index down with it for years. It is possible no significant long term bull market in the DJIA Weekly Index will develop again until after this cycle finally bottoms beyond 11.11.18 (Nov 2018)! However, we may get a short bear rally in mid 2007 based on some shorter weekly cycles and periodic rallies on the 40-week cycle. It is believed all this may take place in the context of a secular bear trend (36-38 year cycle now heading down) which is evident in other world indices. Chart 1 shows the comparison for DJIA Weekly Index for the period from 1918 thru 1922. The basic long and short term weekly cycles of DJIA have been present since before 1913 based on other work. It is possible to do some “forensics” on these past patterns in the DJIA since they repeat (with some phasing differences) over subsequent generations of investors. For example, the passing of the Treasury Act of 1921 and its subsequent effects. Chart 2 shows the largest weekly cycles in the DJIA from 1918 thru August 2005. It suggests there is a 38-year cycle in the DJIA but this dataset is not sufficiently long to resolve the issue. However, we have included the 38-year cycle in this study to see some possible long term consequences. Also, it shows the existence of a growing 10-year cycle (510 weeks) and a 6.7 year cycle. These cycles combined for the latest bear rally in the DJIA but are currently out of phase with the 38-year cycle leading to this long sideways trading pattern which will end in a few months. Chart 3 shows the prediction for DJIA Weekly Index for 2005. The chart shows the DJIA Weekly Index will try and form its final may form top on the year by November 2005. Although the DJIA is currently below its 200-DMA, this often happens in the bottoming of the 36 to 40-week cycle in the DJIA. This 40-week cycle formed its bottom in the DJIA in late June 2005 and will accelerate upwards in mid-Sept giving the DJIA its last shot at a top for 2005. Usually, it is good for small rally. Chart 4 shows the prediction for the DJIA Weekly closing prices thru 2006. It shows a significant downtrend in 2006 with a possible “sideways trading pattern” from April 2006 thru June 2006. June 2006 appears to be an intermediate bottom for 2006 with another minor top forming by Sept 2006 (which may become a tipping point in the DJIA). In particular, I do not like the DJIA formation after Sept 2006 as it strongly suggests another major downside move coming thru 2008. Chart 5 shows the prediction for the DJIA Weekly closing prices thru 2007. It shows a rally developing from April 2007 thru June 2007 (possibly top of a long term down channel). All of these predictions assumed an upward slope in the DJIA with a historic 2.5% slope. Therefore, these charts do not represent the worse-case possible in a downside (long term) move. Chart 6 shows the comparison for the DJIA Weekly Index from 1918-1959 versus the period (amplitudes normalized) roughly from 1962-2003. It basically shows the effects of a possible 38-42 year cycle in the DJIA. Does history repeat itself or is this time different? If it is not different, we are currently forming the final top in the DJIA prior to entering a major recession/depression in the world markets. Bottom Line: The final top in the DJIA for 2005 may occur by late Nov 2005. This could be the final major top in the DJIA for many years to come. Conditions are favorable for the continuing development of a major “cyclonic storm” in the DJIA after late 2006 – we will continue to track and report on developments in the real-time DJIA Weekly waveform with cycles which track back to 1918. We consider the DJIA will be moving into a High Risk situation by Dec 2005 and possible Extreme Risk by early Sept 2006. The long “sideways” trading pattern we have seen in the NYSE/DJIA/S&P 500 Indices is characteristic of huge long term cyclic tops in markets and we are currently approaching the final top(s) in these Indices. The DJIA Weekly Index has a downtrend coming after Dec 2005 thru March/April 2006 with possible start of a second major down wave after Sept 2006. We may yet be in the beginning stages of the 16 to 18-year (K-Wave) down cycle (began in 2002). This was accounted for in the current DJIA predictions in this article as a significant (and growing) effect. Remarks: The current waveform in the DJIA Weekly (from 1918+) does suggest a worldwide recession is slowly in the making but it may not be clearly evident until after March 2007. It is highly questionable as to whether the DJIA Composite Index will see another top as high as the ones in occurring in 2005 (inflation weighted) for the next three to five years!? There is no bull market which can be identified in the DJIA after Dec 2005 for many years (beyond 2012!?). There will be periodic (secular bear) rallies based on shorter weekly cycles. The major problem with the US Dollar is that we are entering into the long tail of the distribution in devaluing the currency (the remaining 3% to 5%) – hardly worth the effort by the Fed anymore. With the world awash in US Dollars, the Central Banks can no longer achieve the same effects with varying the rate of the money supply as they did thirty years ago (and eighty years ago) by simply continuing to print fiat money at different rates over different timeframes (enter the cycles). The US Dollar carries (Healthcare as an example) liabilities the US Government cannot meet. The phase lags are growing too long between the Fed and its money distribution cycles – witness the problems in the long term bond market versus short term rates. There is too much surge capacity (i.e., too many dollars chasing commodities – a bond is a possible commodity in this context) in the system and too much leveraged debt from those US Dollars. To continue the game, we must have a new, single (and unleveraged) world currency – it probably needs to appear within the next ten years. Within the next fifty years, it may have a Panda’s Paw on it.
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INFORMATION DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments. |
