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Dow Industrials: The Next 2,000 Points
Is the major trend up or down?
By Bob Stokes
Thu, 12 Apr 2012 17:00:00 ET
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The Dow Industrials gave back over two months' worth of gains in just five trading days. April 3-10 (the market was closed on the 6th for Easter), the DJIA lost 4.1%.
 
Even so, personal finance magazine SmartMoney reports (4/10) that
 
...many advisers say this pullback is temporary—and, if anything, investors should be buying more stocks.
 
And talk about optimism: the well-known finance professor who wrote Stocks for the Long Run is so gleeful that he told CNBC (4/9) that there's a high probability that the Dow's next 2,000 points will be higher:
 
...the Dow Jones Industrial Average has a 50 percent chance of hitting 17,000 by the end of 2013 and a 75 percent chance it’ll hit 15,000.
 
In the article, the professor explains his prediction:
 
When you start at a 13 price-earnings ratio, get back in history, the future is much, much brighter. We’ve never had bad stock returns over the next three, five, 10 years when you start with a 13 P/E ratio...
 
But do price/earnings ratios (or any other measure of value) really tell us why stocks rise or fall?
 
Read what Robert Prechter wrote in the April 2011 Elliott Wave Theorist:
 
...the stock market never attaches to any benchmark of value, be it dividends, earnings, book values or the bond/stock yield spread. It is ceaselessly dynamic with respect to these “rational” benchmarks of value. In the past century, the major stock market averages have fluctuated 14 times around dividends, 23 times around earnings, 19 times around book value and 16 times around the spread between yields of stocks and bonds issued by the same companies....[in the chart below], the only reason the p/e ratio is listed as fluctuating “only” 23 times is that the graph...smoothes the data over four quarters. In 4Q 2008, earnings were negative, so the p/e was infinite. I submit that any measure that can fluctuate between six and infinity is not a benchmark at all.
 
Here's the chart Prechter mentions:
 
 
 
If rational benchmarks don't drive the market, what does? The answer is investor psychology, which is "ceaselessly dynamic." This psychological dynamism moves in waves.
 
How big is the next wave and how fast is it traveling? 

Tags: earnings, Elliott wave, fundamental analysis, investment strategy, Robert Prechter, S&P 500
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