Has the Dow Severely Corrected Already?

By: Sol Palha | Sun, Sep 17, 2006
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"Say oh wise man how you have come to such knowledge? Because I was never ashamed to confess my ignorance and ask others." -- Johann Gottfried Von Herder 1744-1803, German Critic and Poet

We decided apply the simple concept of pricing the Dow in Gold and Silver in the same way we did in an article titled Dow 1200 Illusion or?

We will take the low of the Dow in the last 4 years and the low that gold put in the last 4 years. As the Dow is priced in Dollars we will divide the price of gold into the Dow. For the record we could choose other price points as they only serve to illustrate our point.

In Oct 2002 the Dow was trading at 7200 (4 year chart) and Gold was trading roughly around 300.



If we divide 7200 by 300 (the price of Gold), we get 24 ounces. Now it took 24 ounces of Gold to buy the Dow back in Oct 2002 (remember we taking the Dow's lows into consideration and not it's highs) so it should take at least 24 ounces or more to buy the Dow today. Let's check that figure out.

In May of this year the Dow put in a new 52 week high and almost tested its old all time high of roughly 11700. For arguments sake we will assume that the Dow traded to 11700 in May. At that time Gold put in a high of roughly 720

11700 divide by 720 = 16.25

Back in 0ct 02 it took 24 ounces to buy the Dow and at this time it was trading at a 4 year low. This means that the Dow was actually trading higher back in Oct 2002 then it was today because today it takes 8 ounces less of Gold to buy the Dow when it's trading at close to a new 5 year high. For the Dow just to break even to its Oct 2002 levels it would have to be at (24 X 720) 17280.

The Dow only made it to 11700 so far. That mean the Dow has corrected over 35% as it should actually be at 17280 instead it's below 11700.  Market technicians state that we are in a bear market if the market has corrected over 20%. Based on these figures we have corrected over 35% yet the Dow has just put in a series of new illusory 52 week highs. Hence in reality the market could technically rally a lot more and still be in a bear market. The funny part is that the bears are actually right but they just don't know how to use this info and the bulls are actually wrong but they happen to using the info for the time being in the right manner.

If we use Silver as the constant the figure we get is even more outrageous and it suggests that the markets have corrected even more then 35%.

Silver was trading around the 5.15 mark in Oct 2002.

Dow 7200 divided by 5.15 = 1398 ounces

May 06 Silver traded roughly to 15 dollars
1398 X 15= 20970; that's the level the Dow should be just to equal the level it was trading in Oct 2002 when priced in silver.

This means that the Dow has already corrected a whopping 44.2% and yet it has put in a series of new 52 week highs. These highs are all illusory in nature.

Since the Dow is priced in dollars lets perform a final test on the Dow. The Dow hit an all time high back in 2000 (look at picture below). To simplify matters lets assume the value of this high was 11700 (actually it's higher).

Charts courtesy of www.prophetfinance.com

Now let's look at what the dollar was doing in the same time period. At the time the Dow put in its all time high the dollar index was trading around 105; this is roughly 20 points (currently in the 85 ranges) lower then where it's trading right now. On a % basis it works out to 19.5%. To make things simple we will round it of to 20. That means the in today's dollars the Dow would have to trade 20% higher then the high it put back in 2000 just to break even. At this point in time the chances of the Dow trading to the 14040 price point level are slim to none. If we were wildly optimistic we would probably issue a target of 12600 at the most; for the record we are not wildly optimistic at this point in time.


This is yet another completely out of the box way of examining the markets and what they are doing. This viewpoint provides yet another valid reason to support our bullish out look on the intermediate time frames. We are still bearish when taking the long term view, however a lot can happen between the short, intermediate and long term time frames. If you are not properly positioned you could end up bankrupt while actually being right.

One could technically state that the market is simply experiencing a long dead cat's bounce or that we are in a long term bear that is truly invisible for the time being. In the end one must understand that when one is dealing with the markets that nothing remains the same forever; those who examine the markets with closed eyes and a closed mindset will find that their wallets enter into the empty zone rather fast. This little exercise also very clearly illustrates the evils of inflation.

"Since we can't know what knowledge will be most needed in the future, it is senseless to try to teach it in advance. Instead, we should try to turn out people who love learning so much and learn so well that they will be able to learn whatever needs to be learned." -- John Holt 1908-1967, Australian Politician, Prime Minister

Final note

Please remember we are just offering another possible way of looking at the Dow. Do not simply jump on the super bullish bandwagon and assume that the Dow is going to keep soaring upwards forever.



Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

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