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Is the Recovery Just Hype? Examining the Potential for Future Declines In the Dow
If the mainstream financial media affects your investment decisions, you're probably doing one of two things right now:
- Politely dismissing yourself from a work meeting to go into a bathroom stall and scream at the top of your lungs
- Impolitely screaming at the top of your lungs in the middle of a work meeting
Long story short: the recent, 400-plus point (4.5%) nosedive in the Dow Jones Industrial Average wasn't part of the new-bull-market blueprint. According to the usual experts, the Dow was on a one-way winning streak after soaring to a fresh, yearly high on Sept. 23.
Consider the following news items from Sept. 20-23:
- "With little on the docket to challenge investor optimism, the defiantly bullish stock market is looking to extend its staggering run in the week ahead." (CNN Money)
- "Equity Markets Remain In 'Bull Mode.' It starts to build a very strong case for a fierce bull rally. Money managers see the stars aligning." (Associated Press)
- "US stocks are in a bull market and have a lot of room to run. The advance shows that the recession is over. I don't' know how you could wish for a better set of circumstances." (Bloomberg)
"Wish"? You wish on a star, not a stock market. Yet so much of the bullish hype coming from Wall Street and the media is based on wishes, hopes, and good 'ol blind optimism.
As for seeing the Dow's recent decline BEFOREHAND, look no further than the Sept. 21 Short Term Update. Our analysts identified several sentiment and structural extremes, and warned that the rally was near a powerful setback:
"The short-term wave structure has come to an important point. If the interpretation of the Dow is correct, then prices should rally... tomorrow with a near-immediate push upward that carries the index above [Thursday's high of 9854.60], but below 10,045, which will be a fifth wave. At that point, the market should experience an elongated decline and make strong progress back toward the early September lows." (emphasis added)
Then on Sept. 23, the Short Term Update presented the following close-up of the Dow and wrote:
"Observe how the Dow has respected the resistance line it drew from the May-August highs. Today's rebuff is the largest so far, suggesting a bigger decline is likely starting."
Bottom line: It may be hard to ignore the deafening chorus of the financial mainstream; but their notes are hardly ever in harmony with actual market trends.