11,000 HAS BEEN A CRASH ZONE FOR 12 YEARS
11,000 has been a crash zone for 12 years.
[Reprint from May 8, 2010]
A summery of facts that led people to think the Dow should go above 11,000 and why it shouldn’t.
I used information I accumulated over the last 20 years to pull out of the market in 2007, and to buy heavy at the bottom of ‘09. I have sold off over the last 6 months after the Dow hit 10,700. Thursday at 2:30 am I sent a email to a major investor warning him the market is very likely to crash, I felt I could not wait till daylight since I had predicted the pattern the Dow would follow before a crash and this was the day. That morning I added heavily to my short position. I was already up 65% from ’07 till now and the short during the Thursday crash added another 4%.
This is the basics of what I used:
If you get a chart of the Dow that goes back to 1960 you will see that we went 20 years with the Dow bouncing up and Down and never going anywhere. Then about the time the baby boomers got old enough to have extra money they invested in the stock market. The volume increased, the stock prices also increased. Like a money pyramid the more people getting in the bigger the pyramid gets. You can also think of it as supply and demand the more people buying the higher the prices go. This continued for 20 years.
As the baby boomers age, there may be a time were the volume goes back to levels close to that of the mid 1980’s. A survey a few years ago said the younger generation sees the stock market as gambling and not a safe investment. Of course they probably felt real-estate was a great investment since the younger generation grew up in a time of great real-estate gains.
Without new money the volume would decline. With lower volume it is hard for a CEO to sell a million shares of his stock options without it driving down the price of his stock.
The end of the 20 year run up ended at about 11,000 12 years ago. The Dow has averaged 9600 from the time it hit 11000 to the start of the bubble. In Oct of 2005 the interest rates went up just enough to curb the exuberate refinancing of homes. It seems almost every home owner was drawing 200,000 out of their homes. 30% of the homes were being bought just to flip for profit. The rise in interest rates tripped it up. Since now the banks were lending less, they came up with crazy policies to boost quantity of loans. At the gym I would here stories of 20 year olds bragging about buying $500,000 homes on a dishwasher’s income.
Buy 2007 flipping homes was waning and people said “I have to put my money somewhere!”
They put it into the stock market.
If you have found a chart of the Dow as I mentioned earlier you will see the Dow bubbled from 11,000 to 14,000 even though companies like Ford, Fleetwood motor homes, Home Depot and others were seeing some problems since October of 2005.
But people “had to put their money somewhere” so into the market it went.
If on the Dow chart you draw a line at 11,000 you will see for the last 12 years it crashes when it crosses it.
The market recently ran up because Christmas sales were better in 2009 then in the fear riddled 2008 season; manufacturing increased in the first quarter of 2010 after a year of companies depleting their inventories to save money; profits were up from cost cutting: cessation of expansion, layoffs, reduced advertising and other growth expenses. Although the increases in sales and production were easily predicted they helped the Dow to cross 11,000. The run up was done with lower then normal volume; it only takes two people to drive up a price: one buyer; one seller.
Low volume buying while sellers sat in wait. The last six months the market rate of climb slowed and showed signs of declining, then it tried 11,200 three times and failing; the Dow sellers pounced Thursday and again Friday.
Here on Main Street we are comparing our sales levels to 1998 in real dollar amounts. If our economy is better then in 1998, then the Dow should be higher then the 8500 average of 1998, but if it is not as strong then were should it be? I am assuming the market is worth 8500 and that above it is optimism and below it is pessimism. I am optimistic but not 11k worth.
Overall this market is like the crash of 1929, a building boom followed by a bust followed by a crash in the market. Then a rebound on optimism followed by a drop from reality; this is not like the recessions leading up to this, this is the real thing that we feared during those recessions.
Conclusions: A full recovery to the Dow is 11,000 since the pre recession levels above 11k were not justified. 11k is for a healthy growing economy. The market does not always go up. Keeping stocks in your portfolio for a long time does not make them more valuable. The higher Christmas sales and the restocking of inventory is not a sign of recovery. I am optimistic but disappointed the lack of sales was not just from fear.