dow jones


Take the 1000 Dow level @ 1970 add 40yrs @ 3% inflation with say 3% average dividends and the PV = 10,250’ish. Unless something within the fundamentals changes, we could be back and forth for a while. Of course you can substitute earnings yield for dividends, and see what value pops out.

Dow Theory as espoused by Charles Dow was all about the primary trend, modified by the secondary trend ignoring the daily fluctuations, with confirmation from both sets of indices. So lets look at the primary trend and the confirmation, or lack thereof.

From Robert Rhea;

Under Dow’s theory the primary trend, once authoritatively established as bullish, is considered to be continuing in force until negated by a confirmed bearish indication such as would be the case when, after a reaction of full secondary proportions in a bull market, a rally fails to lift both averages to new high ground, and a later decline carries both averages below the preceding secondary low.”

William Peter Hamilton – “The movement of both the railroad (now the Transports) and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading.”

William Peter Hamilton – “Dow’s theory stipulates for a confirmation of one average by the other. This constantly occurs at the inception of a primary movement, but is anything but consistently present when the market turns for a secondary swing.”

William Peter Hamilton – “When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive.”

William Peter Hamilton – “Indeed it may be said that a new high or a new low by one of the averages unconfirmed by the other has been invariably deceptive. New high or low points for both have preceded every major movement since the averages were established.”

William Peter Hamilton – “The two averages may vary in strength, but they will not vary materially in direction especially in a major movement. Throughout all the years in which both averages have been kept, this rule has proved entirely dependable. It is not only true in the major swings of the market, but it is approximately true of the secondary actions and rallies. It would not be true of the daily fluctuations, and it might be utterly misleading so far as individual stocks are concerned.”

Robert Rhea – “The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages.”

Robert Rhea – “The Dow theory deals exclusively with the movement of the railroad and industrial stock averages, and any other method would not be Dow’s theory as expounded by Hamilton.”

Robert Rhea – “A wise man lets the market alone when the averages disagree.”

Robert Rhea – “When the averages disagree they are shouting ‘be careful’.”

With regard to the Industrials, a new Bull trend was in play with the breaking of the previous high of 2000. The low of 2003 constitutes a Low, that would indicate a new Bear trend [primary] Currently what we have is a secondary movement, which is a corrective movement, but, not a new primary trend.

The transports far more clearly demonstrate the lack of a new Bear primary trend, and are simply in a secodary trend, very near a continuation point for the primary trend.

Thus, the economy as a whole, remains, as far as Dow Theory, in a corrective phase, or secondary movement. Until a new primary trend is indicated and confirmed by both indices, we remain in a corrective phase.

Sept. 18 (Bloomberg) — Kraft Foods Inc., the world’s second-largest foodmaker, will replace American International Group Inc. in the Dow Jones Industrial Average after the biggest U.S. insurance company was taken over by the government.

Kraft, whose top shareholder is Warren Buffett’s Berkshire Hathaway Inc., will replace AIG on Sept. 22. News Corp.’s Dow Jones Indexes said it declined to add another financial company to the 112-year-old stock average “because of the extremely unsettled conditions” in global markets.

Buffett, that crafty cockney, smells of roses again. This was just recently spun-off.

Still no confirmation twixt the DJIA & DJ Transports

Some long term data to provide some context.

GDP Nominal 1885-2007……………………..+5.97% compounded
Dow Jones 1885-2007………………………+5.05% compounded
Inflation 1885-2007………………………….+2.58% compounded

Thus we can see that the DJIA has tracked the growth of the economy quite closely, returning a positive real return. This does not include dividends, which would increase the return substantially. From a viewpoint of Dow Theory however, the data correlates.

Chicago & North Western
Delaware, Lackawanna & Western
Lake Shore
Louisville & Nashville
Missouri Pacific
New York Central
Northern Pacific Pfd
Pacific Mail
St Paul
Union Pacific
Western Union

Pacific Mail was a Steamship company.
Western Union was a Telegraph company.
All the other constituents were Railways.

By tracking the constituents of the index, and later Transports and Industrials indices, it can be analysed with regard to Dow Theory. By tracking the changes through history, and their relevance to the economy at the time, eventually the current index can be evaluated in terms of the Dow Theory.

Greatest DJIA Daily % Gains
of All-Time
Rank…… Date………………. Close….. Net Chg.. Chg%
1……….. 15/03/1933………. 62.10….. +8.26….. +15.34
2……….. 06/10/1931………. 99.34….. +12.86… +14.87
3……….. 30/10/1929………. 258.47… +28.40… +12.34
4………. 21/09/1932………. 75.16….. +7.67….. +11.36
5………. 21/10/1987………. 2,027….. +186….. +10.15
6………. 03/08/1932………. 58.22….. +5.06…. +9.52
7………. 11/02/1932………. 78.60….. +6.80…. +9.47
8……….. 14/11/1929………. 217.28… +18.59… +9.36
9……….. 18/12/1931………. 80.69….. +6.90….. +9.35
10……… 13/02/1932………. 85.82….. +7.22….. +9.19
11……… 06/05/1932………. 59.01….. +4.91….. +9.08
12……… 19/04/1933………. 68.31….. +5.66….. +9.03
13……… 08/10/1931………. 105.79… +8.47….. +8.70
14……… 10/06/1932………. 48.94….. +3.62….. +7.99
15……… 05/09/1939………. 148.12… +10.03… +7.26
16……… 03/06/1931………. 130.37… +8.67….. +7.12
17……… 06/01/1932………. 76.31….. +5.07….. +7.12
18……… 14/10/1932………. 63.84….. +4.08….. +6.83
19……… 15/03/1907………. 81.33….. +5.10….. +6.69
20……… 20/06/1931………. 138.96… +8.65….. +6.64

Dow Jones Industrial Average
EVENT………………………DATE………….. DAY%………… 6-MONTHS………….1-YEAR LATER
Operation Iraqi Freedom 03/19/03…………0.26% ……………14.59% ……………….23.24%
America Strikes Back 10/07/01 …………..-0.57%…………… 12.63……………….. -18.61
Terrorist Attack……… 09/11/01………. -7.12%…………… 10.47……………….. -10.66
Oklahoma Bombing….. 04/19/95 …………0.68%……………. 14.92%……………… 32.46%
WTC Bombing……….. 02/26/93………….0.17%…………….. 8.41%………………. 14.07%
Somali Crisis………… 12/04/92…………..0.57%…………….. 7.80%………………. 12.63%
Operation Desert Storm 01/16/91………..4.57% …………….18.73%………………..30.14%
Kuwait Invasion*……. 08/02/90………..-6.31%……………. -5.81%………………. 3.69%
Panama & Noriega 12/15/89……… -1.53%……………… 7.17%…………….. -5.32%
Hostage in Grenada 10/25/83……………-0.69%……………. -7.10%…………….. -3.31%
Reagan Shot……….. 03/30/81………….-0.26%…………… -14.56%…………… -17.12%
Iran Crisis…………… 11/04/79 Sunday -0.77%…………….. -0.32%…………….. 14.44%
Watergate
First Story Published 08/01/72 Tuesday 0.62% ……………..6.60%…………….. -1.36%
Congressional Investigation 02/07/73..-1.15%…………….. -6.91%…………… -15.43%
Senior WH Aides Indicted 03/01/74….-1.00%……………. -21.14%…………… -14.12%
Articles of Impeachment
Passed 07/27/74 Saturday………….. -1.74%……………. -10.02%…………….. 5.14%
Nixon Resigns 08/08/74 Thursday….. -1.59%……………. -10.74%…………….. 2.53%
Vietnam Conflict 02/26/65 Friday…….. -0.41%……………. -0.81%……………… 5.48%
Tonkin Gulf Attack 08/04/64………….. -0.90% ……………..7.58%……………… 5.18%
Kennedy Assassination 11/22/63………-2.89%……………. 12.04%…………….. 21.58%
Cuban Missile Crisis 10/22/62……….. -1.85%…………….. 25.05%……………… 31.41%
Sputnik Launched 10/04/57…………. -2.01%……………. -4.59%………………. 15.60%
Korean War 06/25/50………………… -4.65%……………… 2.36%……………….. 9.34%
Pearl Harbor 12/07/41…………………-3.50%…………….. -9.48% ………………-1.37%
Lusitania Sinks 05/07/15…………….. -4.54%…………….. 36.01%……………… 32.75%
USS Maine Explodes 02/15/1898…….-2.14%……………… 14.91%……………… 24.90%

So what might you takeaway from the preceeding?

First and foremost, the wars, WWII, Korea, Cuban missile crisis, Vietnam, Twin Towers and the Middle East all had favourable, or at least non-catastrophic outcomes. Had a different outcome, viz. a loss resulting in a home soil invasion, the Dow results would possibly be very different.

With headlines regarding Presidents, Watergate, Kennedy assasination, the Dow seemingly simply reflected the trend after the initial headlines passed. Thus, should similar headlines, and of course they will, intrude in the future, they could be placed in context of the underlying trend. They should not materially affect the trend other than over the very short term. In a bull market, they would in fact probably offer a buying opportunity.

When Saddam Uncaged a Bear
Who’s afraid of Saddam Hussein?

The stock market was, in 1990. Iraq’s invasion of Kuwait, and concern about the Iraqi leader’s unpredictable behavior, helped spark a 21% decline in the Dow Jones Industrial Average.

It became known as the Saddam Hussein bear market. Although unusually swift, the decline met the classic definition of a bear market: a 20% decline in major stock indexes.

The average had been knocking on the door of the 3000 mark that summer. It stopped a fraction of a point away, with twin peaks of 2999.75 on July 16 and July 17. Then, prices began to slide, ending with an Oct. 11 low of 2365.10.

Iraq invaded Kuwait Aug. 2, and much of the damage in the stock market took place in mid-August, after President Bush had said the invasion ”cannot stand,” but before it was clear what America would do. Fear that the U.S. might get involved in a prolonged war, or that Mr. Hussein might deploy chemical or biological weapons, helped to spook stocks. As it turned out, the war was quick and resulted in an overwhelming U.S. victory. On Jan. 17, 1991, after hostilities actually began and the results looked good for U.S. forces, the Dow industrials soared 114 points.

Laszlo Birinyi of Birinyi Associates says the stock market predicted the outcome of the war better than most people did. ”The market as early as October had decided that the war was not going to be an event of lasting significance,” he says.

Of course, Iraq wasn’t the only thing troubling the stock market in 1990. There also was unease about the economic situation. In fact, the U.S. was in an undeclared recession. Not until 1992 did the National Bureau of Economic Research officially recognize that the U.S. had been in a recession from July 1990 to March 1991.

At the end of 1999, the 1990 decline was still considered the last bear market. In the eight years that followed, the biggest dip was 7.2% in October 1997. The market recovered the 554-point drop in less than a month.

When the U.S. once again faced off with Saddam in 1998 over U.N. weapons inspections, the market seemed relatively untroubled. The commencement of air strikes against Iraq was followed by a slight but steady rise in the average that led the Dow past 10000 for the first time.

Topping the Elusive 3000 Mark

Talk about a tease.

The Dow Jones Industrial Average seemed to be closing in on the 3000 mark in the summer of 1990. It looked as if the average would make quick work of the 3000 milestone, about 3-1/2 years after it passed the 2000 mark, in January 1987.

On July 17, 1990, the Dow industrials closed just a quarter point shy of the next thousand-point mark, closing at 2999.75. The next day, the average shot above 3000 in intraday trading, only to close unchanged at the tantalizing level of 2999.75.

Several times during July, the intraday high exceeded 3000, but the industrial average couldn’t manage to close above that mark. And for the remainder of 1990, the 3000 mark proved elusive.

The economy was in a recession — albeit one that wasn’t declared until it was already over — and worries about Iraqi dictator Saddam Hussein’s aggression in the Persian Gulf ran high. The industrial average fell all the way back to 2365.10 in October. Investors saw eerie reminders of 1966, when the Dow industrials broke 1000 intraday, only to take six years before they pierced that level at the closing bell.

Finally, in the spring of 1991, after the U.S. had overwhelmingly vanquished Saddam Hussein’s forces and the recession (still undeclared) was over, the industrial average rallied and broke the 3000 barrier, closing at 3004.46. The date was April 17, 1991, a little more than four years after the 2000 barrier fell. By contrast, it took the average 14 years to get from 1000 to 2000 (a larger percentage move).

George Bush, who had presided over the Gulf War against Mr. Hussein’s forces, was president when the milestone was reached. But the economic weakness of 1990 and early 1991, among other things, weakened his standing with the electorate and he lost the 1992 presidential election to Bill Clinton.

Once the 3000 mark was passed, notes Laszlo Birinyi, head of Birinyi Associates in Greenwich, Conn., the market settled into a remarkably tight trading range, ”almost a knot.” For eight months, the industrial average spent almost all its time between 2900 and 3100. It was as if the 3000 level had become a magnet. Then in late December, stocks took off again, on their way to the next milestone.

Where Were You at Dow 2000?

It may seem hard to believe after the Dow Jones Industrial Average has been at 10,000, but it was only a little more than 12 years before, on Jan. 8, 1987, that the average first hit 2000.

You remember 1987. Michael Douglas starred that year in the movie ”Wall Street,” portraying the greedy Gordon Gekko.

But the real fireworks in 1987 took place on the real Wall Street. The industrial average started the year at 1895.95, then staged one of the most impressive advances in history, surging nearly 44%, and peaking at 2722.42 on Aug. 25. In the fall it turned around and suffered one of the biggest declines on record, dropping nearly 1,000 points in two months. The selling cresendo peaked on Oct. 19, with a 508-point, nearly 23%, crash, the worst one-day drop ever.

When the Dow industrials surpassed the 2000 mark, almost no one foresaw the pyrotechnics to come. The prevailing feeling was that, having climbed to 2000, the average would need to rest for a while.

Alfred Goldman of A.G. Edwards & Sons in St. Louis predicted ”a victory celebration and then a headache.” New York money manager Robert Stovall predicted a ”groundhog day” effect in which the market would ”see its shadow, and promptly duck down again.” Mary Farrell of PaineWebber predicted a trading-range market hovering between 1800 and 2200.

Nor did many people guess at the time that seven additional millenary milestones would fall in little more than a decade. After all, it had taken the industrial average about 76 years to reach 1000, in 1973. Then it took nearly 14 years for the average to climb to 2000.

Of course, it’s easier and easier to hit each 1,000-point milestone, because each point gain becomes smaller on a percentage basis as the index rises.

”I’m excited. This is history,” exclaimed trader Jack Baker, then with Shearson Lehman Brothers in New York, the day the 2000 barrier was snapped. ”I caught 1000 and 2000 and I hope to live long enough to catch 3000.” Mr. Baker captured the prevailing mood. But though hardly a soul suspected it at the time, the 3000 mark was only four years away.

How Long it Took

When the Dow Jones Industrial Average reached each of eleven 1,000-point milestones

1,000
Nov. 14, 1972
76 years

2,000
Jan. 8, 1987
14 years

3,000
April 17, 1991
4 years

4,000
Feb. 23, 1995
4 years

5,000
Nov. 21, 1995
9 months

6,000
Oct. 14, 1996
11 months

7,000
Feb. 13, 1997
4 months

8,000
Jul. 16, 1997
5 months

9,000
Apr. 6, 1998
9 months

10,000
Mar. 29, 1999
12 months

11,000
May. 3, 1999
1 month

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