Friday, October 2, 2009

Dow Jones - Amazing Bull Charge

From the level of sub 1000 in 1971, Dow Jones (Dow Jones Industrial Average) has recorded its all time high of 14000 plus on 11 Oct 2007. In other words Dow has notched up around 13000 points in 38 years, or simply put it blossomed 14 times. That is an average annual return of 36.% which is not bad at all. In this journey northwards there has been some major corrections. Leaving aside a quick and serious dip in 1988, Dow has given overall good returns to its long term investors till year 2000.

Periods of excellent returns have been many but from year 1995 to 2000 Dow went ballistic and notched up roughly 8000 points. This leg of journey saw Dow cover ground from 4000 to 12000. To my mind this has been the most audaciously steep rise in a span of 5 years.

Then in year 2000 it started its tumble and lost nearly 5000 points in 3 years, scaring the wits out of investors with all pervasive climate of gloom and doom. Just when people thought everything was lost, Dow again picked itself up and almost did an encore of 1995 bull run in next 5 years. From year 2003 to 2008 Dow repeated its stellar performance of period 1995-2000. However this time around it managed to notch up about 7000 points, traversing the distance from 7177 to 14279.

No sooner did the 5 year period of joy for bulls got over that we became spectators to one of the worst mauling by bears on Wall Street. In next to no time Dow Jones lost approximately 7800 points. You can remember the ferocious agility when you recall this major index on planet earth lost more than half its worth in about 18 months. Phew! What devastation that would have caused to millions of investors !!

Since Mar 2009 Dow Jones is on a recovery path. In fact it has recovered almost 50 % of lost ground. Now the question that begs our attention is whether Dow is finally out of the woods or not. I am presenting some pointers which may help you to decide for yourself :-
  • Last correction of year 2000 lasted 3 years and we have completed only 2 years since this correction began in Oct 2007.
  • Bottoming out process is generally a long drawn affair for such a vicious fall. That indicates some more time may be required for Dow to finally recover and surge ahead for another bull charge.
  • Already news flow is turning negative in US, showing ugly signs of loss in confidence data.
  • 50% pullback to the bear phase means Dow Jones should reach 10360, which it nearly has. So one can expect a fall from level of 10500.
In all likelihood history would like to repeat itself. So you can say that Dow Jones may take another year to fully recover from the bear mauling. Till that time I guess we should be ready to witness another bout of selling which may take Dow down to 6500 level and maybe even lower. In the best of conditions expect Dow to touch at least 8500 level in coming months.