SeriousBull

Dow 10,000?

Tags: Dow 10000 + Dow Jones + Markets

Today, December 8th, the markets fell marking a 10% decline from their near term highs signaling a stock market correction is underway. Broad market indices broke their technical support levels and should now test the next leg down.

The S&P500 finished 2007 with a P/E of 18.8. Since the long term market average P/E is 15.3, this would imply a S&P 1193 level and a Dow Jones Industrails level of 12,000 or approximately a 18.6% decline in both indices from their high water marks made in October. However it is clear we are not in an ‘Average’ economy, we are in a sub-par economy meaning something less than a 15.3 P/E ratio is warranted. If we assume a 14 P/E is reasonable, this implies a Dow index some 25% off its recent high or a Dow level of 10640. This is a reasonable target since no sustanable support exists until we reach a Dow in the 10500 range, particularly if we blow past Dow 11150.  This 10500 level is SB’s forecast for where the Dow is likely to fall by Q2 of this year.

The Fed may be forced to use some ’shock & awe’ in an attempt to thwart a Recession, but as we have previously said, the Fed’s first priority is to assure the solvency of the banking system by creating spread to increase bank profitability.  This is not to say that the Fed won’t continue to offer token degrees of accommodation to support market and consumer confidence–ie, cut the Fed Funds rate to support the Dow so consumers don’t feel like they’ve lost their savings and their homes–but cutting interest rates has far too great negative consequence in terms of both Dollar value and inflation.

In summary then, a correction is underway. It will be punctuated with interim rallys that can be traded, but the trend is down. Resist the inclination to buy into Fed rate cut probabilities as there are few effective monetary tools available. Wait for uncertainty to abate before getting long major market indices. Beware of all and place your bets swinging from a neutral position.

January 10, 2008 - Markets