If you are a long-time reader you will have noticed that this site has predicted the possibility of Dow 10,000 for the past year. So where will it go from here?
Please recognize that in making forecasts I tend to disregard short term fluctuations and focus on the big picture, analyzing many cycles, trends and fundamentals (and instinct) to determine where the market will ultimately lead. The mistake forecasters and economists too often make is getting caught up in short-term sentiment. In a time when everyone is bullish and market levels rallying, defying all negative expectations, many are fooled into assuming it must continue its upward climb forever. This is where the wise contrarian investor steps in and sells.
The same is true when the market is precipitously dropping. recall Fall of 1998 when the Dow plunged to 7400. All the mainstream magazines had end-of-the-world stories on their front pages indicating a serious U.S. recession was in the cards. This was a time of extreme bearish sentiment (this site predicted this crash as well). At the very bottom, in early October, anyone who would dare forecast a rally and return to a bull market was a black sheep...an outcast. This was when I felt uncomfortable in bearish thought, as this often indicates a bottom.
Consequently Alan Greenspan proceeded to lower interest rates in the nick of time and averted further declines. This action was partly responsible for continuing the US boom making it the longest peace-time expansion in U.S. history.
What defied even my predictions is the strength of the recent recovery. however, taking a look back, it becomes clear that there is a rare pattern that emerged. A pattern of crash and recovery I will call a "triple bounce" sequence, that is nearly complete. What is meant by this? I will elaborate further on this concept in a future article, but its essense is this: Shortly before a socio-economic system is about to go through a historic change, at the end end of a record rise, the market crashes than rebounds in a three-stage bounce, each being of a similar nature. We saw the first crash in the fall of 1997. It then rebounded back up until a crash of similar style occured one year later in the summer/fall of 1998. It then rebounded. It is now apparently following the same pattern as 1997 and 1998 with the peak occuring no later than summer 1999. At this point, in conjunction with Y2K, we should see the third and final crash to which we will not recover for at least a decade.
Some other obsevations:
No sane investor would dare look at present valuations and conclude that this is a healthy market to buy into...unless they are speculator. Market capitalization historically averages 50% of GDP. Shortly before the crash of 1929, an era of extreme speculation, it was a whopping 87%. What should make any investor paranoid is the fact that it is now 125% of GDP in the U.S.! To bring it down to a sane level means (approx.) Dow 3,300. But in a crash/depression situation it would temporarily drop to (say) 25% of GDP which would mean a Dow of 1,500. If y2k creates a depression where Gdp drops 20-30% then the Dow, correcting for these numbers, would approach 1,000 or less.
Price to earnings levels are at a range never before seen. P/E ratios in a normal market typically range from 8-15-to-one. When it hits 21 or 22-to-one, one of two things usually happen: The price of the market must decline or the earnings must be raised. The insanity of the current mania is the fact that it at a never-before-seen 35-to-one! This is only the broad average ,of course, and many individual stocks are in the triple digit range.
It's only a matter of time before the bubble bursts, and a tremendous amount of wealth will be lost. I see two possible scenarios for the remainder of ths year.
Forecast #1 is a crash down to the 7,000 range begining around May, 1999 to which it wil stagnate until after July/August when it begins its long-term crumble.
Forcast #2 : Hovers around Dow 10,000 and continually tests it. (Not to exceed 11,600 if it enters a rally--but this is doubtful anyways) until after Aug./Sept. when the disastrous and final crashes begin.
Assuming Y2K doesn't bring a total breakdown, it should eventually reach a trough of between Dow 400-1000 to be reached by 2003/2004.
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