Category Archives: Charles H. Dow

The Canadian Economy

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Eli Lilly Downside Targets

The data covered is from February 8, 2018 to March 12, 2024.

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Dow: Spanish Flu vs. Covid-19

A comparison between the Dow Jones Industrial Average during the Spanish Flu Pandemic and the Covid-19 Pandemic. Continue reading

Energy Sector Q&A #OOTT $WTI

A reader asks:

“What could trigger this downside? Just a technical ‘reversion to the mean’?”

Our response:

We are not sure of the catalysts that could trigger the move to the downside.  As an example, this from September 7, 2015 on the prospects of where the price of oil would go:

"...lurking in the background is the extreme downside target of 575.41.  Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point."

At the time, we had no clue that a pandemic was on the horizon.  The only thing we had was the price and the potential for the downside bases on the work of Edson Gould.  We can’t dispute the reversion to the mean reality.  However, Gould's work on PRICE points to situations that are far beyond just mean reversion.

Another example was our April 26, 2012 posting titled “A Warning for Chesapeake Energy Stockholders.”  Based on the work of Edson Gould, the indication was that:

“If CHK falls significantly below the $4.94 level, then the stock has a high likelihood of going all the way $0.67.”

At the time, Chesapeake Energy was trading at $18.10 and ultimately filed for bankruptcy on June 29, 2020.

Gould’s work on price highlights what S.A. Nelson (coined the term Dow’s Theory) has alluded to in the work of Charles H. Dow regarding the tendency for prices to not only mean revert but go to an extreme after achieving the mean.  Nelson called it artificial advance and artificial depression.  Our 2009 examination of this concept, which has developed greatly since, can be found here.

Thanks for the great question.  We really appreciate the feedback.

see also:

Dow’s Downside Targets for the Nifty 50

Below are the downside targets based on the work of Charles H. Dow. Continue reading

DJIA Downside Targets Using Dow Theory and Gould

This posting will cover the downside targets for the Dow Jones Industrial Average using Dow Theory and Edson Gould’s Speed Resistance Lines [SRL].

Dow’s Theory: 2020-2021

Applying Dow Theory from the March 23, 2020 to September 2, 2021 period, the downside targets for the Dow Jones Industrial Average are: Continue reading

Dow Doubling Rate:1900-2020

In a August 18, 2020 MarketWatch.com article written by Brett Arends titled “Uh-oh: Investors predict ‘Dow 50,000’ — in just five years”, it states:

“…a sample of 1,500 people here in the U.S. who manage their portfolios, the average person expected the stock market to generate sky-high returns of 15.4% a year over the next five years.

“After accounting for dividends, that would mean stock prices would nearly double by 2025…”

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The conclusion of the article:

“It is, ominously, generally near market peaks when investors are most bullish. Whether we’ll have a crash or a bear market is another matter.

“Yes, 15% could technically happen. But I wouldn’t bet on it.”

One element that is missing is the actual doubling rate data of the Dow Jones Industrial Average.  Below is Doubling Rate of the Dow starting when the Dow Jones Industrial Average was at 55 on July 2, 1900 until 2020.

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The actual doubling rate data suggests that the conclusions arrived by Mr. Arends are incorrect.

Our next article on this topic will break down the key elements to understand about the data presented which will make it clear that, doubling from the current level might be a modest proposal.

On This Day: Charles H. Dow

On this day, Charles H. Dow of the Wall Street Journal, said the following:

“The true currency of commerce is credit. A part of this credit is represented by cash, but the larger part is represented by book entries on the ledgers of banks and merchants, representing the intangible credit of the borrower.”

-George W. Bishop. Charles H. Dow: Economist. Dow Jones Books. 1967.

On This Date: Charles H. Dow

On this date in 1900, Charles H. Dow, in the Wall Street Journal, said the following:

“The iron trade, while improving from one point of view, is in a position where the surface is unfavorable. When it is decided to reach bedrock prices by allowing everybody to make prices to suit himself, it means the survival of the fittest. The process of crushing out the least fit will be unpleasant for the victims and will make the situation appear worse than the facts really are.”

-Laura Sether. Dow Theory Unplugged. W&A Publishing. 2009.

Bear Market Duration

In terms of duration:

  • “The majority of bear markets have lasted from ⅓ to ½ as long as the preceding bull market (Russell, Richard. Dow Theory Letters. February 6, 1970. page 3).”
  • “…most bear markets last around one-third as long as the preceding bull market (Russell, Richard. Dow Theory Letters. August 22, 1990. page 2)."

A bear market usually lasts ¼ to ⅓ of the preceding bull market.  It’s just a rule of thumb but it will be clear why this is needed.  Let’s look at the data, based on Charles H. Dow’s requirements, and arrive at potential durations for the current bear market.

The bull market of 2002 to 2007 had a bear market that was 28% (in time) of the trough to peak.

If this bull market began in 2009 and ended on February 2020 and matched the length of the 2002-2007 bear market then the presumed equivalent would bring the end of the bear market out to July 2022 (approximately).

However, let's assume that this bear market is going to last 14% of the 2009-2020 period (half of the 28%), then that would bring us out to April 2021 (approximately).

Being as conservative on the bear market scenario as possible, if this bear market lasts 7% of the 2009-2020 period, then that would bring us out to September 2020 (approximately).

On April 3, 2019, we said that the 2014-2016 period might have been a recession (as outlined in a major publication).  If we took 25% of the period from the February 2016 low to the February 23, 2020 peak as a separate bull market then the current bear market would end in December 2020.

This is going to be a long year even under the best case scenario with a bear market that ends approximately September 2020.  When we say it ends in September 2020, we mean that the price of major indexes decline below the lowest levels already reached on March 23, 2020.

Is Qualcomm Finally Untethered?

On April 16, 2019, Qualcomm (QCOM) and Apple (AAPL) agreed to settle their ongoing disputes.  The outcome was significant for Qualcomm.

As Charles H. Dow, co-founder of the Wall Street Journal has said:

“The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end.  The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook.  Wall Street Journal. February 25, 1902.)."

For many years, the market price of QCOM appeared to be reflecting the neglect of speculators.  In the meantime, investors slowly and selectively accumulated shares of QCOM in anticipation of the high risk proposition that QCOM would prevail against AAPL.

As seen in our chart below, QCOM has found its share price at the undervalued level several times since 2016.  The September 13, 2018 announcement of the accelerated share buyback seems as though it was at an elevated prices.  However, as our updated 10-Year price target indicates, the prospects for QCOM are far in excess of current levels.

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In many respects, the price of Qualcomm has been at the mercy of Apple and their ongoing lawsuits.  However, Charles H. Dow has the following to say of such conditions:

“The manipulator is all-powerful for a time. He can mark prices up or down. He can mislead investors inducing them to buy when he wishes to sell, and to sell, when he wishes to buy; but manipulation in a stock cannot be permanent, and, in the end, the investor learns the approximate truth. His decision to keep his stock or to sell it then makes a price independent of speculation and, in a large sense, indicative of true value (Dow, Charles H. Review and Outlook.  Wall Street Journal. October 18, 1901.).”

We believe that Apple has played into the hands of value investors and we’re thankful for it.  Now the test becomes whether Qualcomm will realize the overvalued targets that we have set for the stock, as seen here.

Dow, Hayek, and Graham: Price as Knowledge

Price conveys knowledge, that is the conclusion of Russ Roberts in an EconTalk podcast with Don Boudreaux dated October 28, 2013.

More specifically, Roberts was citing the work of F.A. Hayek’s “The Use of Knowledge in Society” dated 1945 and concluded that “price conveys knowledge” is the overall point of the paper.

Additionally, F.A. Hayek says:

“It is more than a metaphor to describe the price system as a kind of machinery for registering change...”

No reputable economist would want to associate their work with the actions or intentions of a speculator or investor.  However, Charles H. Dow, co-founder of the Wall Street Journal and namesake of the Dow Jones Industrial Average, has said as much about price only 43 years before the work of F.A. Hayek.

On February 25, 1902, Dow said:

"The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end.  The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook.  Wall Street Journal. February 25, 1902.)."

This aligns with F.A. Hayek’s claim that:

“…the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.”

As Dow Theorist Richard Russell has repeatedly said, the only constant is change.  The work of Charles H. Dow reminds investors that the “special knowledge of circumstances” around price helps to determine values, which are constantly changing.  This explains why:

“…the major consideration for the investor is not when he buys or sells but at what price (Benjamin Graham, David L. Dodd, Sidney Cottle. Security Analysis, Fourth Edition. 1962. Page 70.).”

Graham would never tell an investor to time the market.  However, a “special knowledge of circumstances” would compel an investor to determine a price (based on values) that is appropriate for consideration.  This period for consideration is usually a “fleeting moment not known to [many] others.”

The work of Charles H. Dow covers almost all of the topics discussed by Hayek and Graham and thirty years beforehand.

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The Dow and Recessions

The following is raw data on the performance of the Dow Jones Industrial Average (DJIA) versus the National Bureau of Economic Research (NBER) call of a recession from the peak to trough from 1900 to 2018.

Our aim is the determine if there is any coincidence or correlation between the two.  We’d also like to emphasize that it would be especially ideal if there is confirmation of the idea that the stock market is a leading indicator for the economy.

Simple Coincidence

Below is the simple coincidence of the DJIA and NBER.  This takes the date when the NBER calls a recession or an expansion and registers the level of the DJIA for the first trading day of month that an NBER call takes place and registers the level of the DJIA when the next NBER call begins.

The times when an recession was called but the DJIA was instead higher is indicated in red.  As an example, On August 1, 1918, the NBER indicated that there was a recession until March 1, 1919.  In that same period, the Dow increased from 80.71 to 85.58.

There was no instances of an expansion period being called by the NBER that was followed by a lower level in DJIA.

Date NBER DJIA
December 1, 1900 expansion 66.43
September 1, 1902 recession 66.55
August 1, 1904 expansion 52.73
May 1, 1907 recession 83.87
June 1, 1908 expansion 74.38
January 1, 1910 recession 98.34
January 1, 1912 expansion 82.36
January 1, 1913 recession 88.42
December 1, 1914 expansion 56.76
August 1, 1918 recession 80.71
March 1, 1919 expansion 85.58
January 1, 1920 recession 108.76
July 1, 1921 expansion 91.26
May 1, 1923 recession 97.40
July 1, 1924 expansion 96.45
October 1, 1926 recession 159.69
November 1, 1927 expansion 181.65
August 1, 1929 recession 350.56
March 1, 1933 expansion 52.54
May 1, 1937 recession 174.59
June 1, 1938 expansion 110.61
February 1, 1945 recession 153.79
October 1, 1945 expansion 183.37
November 1, 1948 recession 189.76
October 1, 1949 expansion 182.67
July 1, 1953 recession 269.39
May 1, 1954 expansion 319.35
August 1, 1957 recession 506.21
April 1, 1958 expansion 445.47
April 1, 1960 recession 615.98
February 1, 1961 expansion 649.39
December 1, 1969 recession 805.04
November 1, 1970 expansion 758.01
November 1, 1973 recession 948.83
March 1, 1975 expansion 753.13
January 1, 1980 recession 824.57
July 1, 1980 expansion 872.27
July 1, 1981 recession 967.66
November 1, 1982 expansion 1,005.70
July 1, 1990 recession 2,899.26
March 1, 1991 expansion 2,909.90
March 1, 2001 recession 10,450.14
November 1, 2001 expansion 9,263.90
December 1, 2007 recession 13,314.57
June 1, 2009 expansion 8,721.44
December 1, 2018 recession 25,826.43

There were 8 instances (17%) where there was no coincidence with the call of a recession or expansion and a commensurate decline or increase in the DJIA.

The above coincidence data is graphically represented below.  The areas in red includes the the divergence of the NBER call for a recession and the DJIA along with the period that immediately followed.  This is basically showing that any recession indication that is followed by an increased in the DJIA, and the subsequent expansion calls, are not considered to be coincidence until after the last expansion and the next coincidence of a recession call.

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Naturally, this puts the coincidence level at 65% instead of the previous 83%.  This is a literal take on whether there is a coincidence between the direction of the DJIA and when the NBER actually calls a recession or an expansion.  It could be said that the DJIA follows the directions of the NBER except that the call made for the economy usually takes place at least a year after the fact.

Recession Length and Coincidence

Another method for measuring the coincidence of the DJIA and the official NBER definition of a recession is to rank the recession by length.  In this case, we take the beginning of a recession and end of a recession and use the first trading day of that month and measure to the first trading day of the month when the recession is considered to have ended. Below is the ranking of the length recessions from shortest to the longest compared to the DJIA.

NBER peak NBER trough previous expansion (months) DJIA
January 1, 1920 July 1, 1921 10 -37.16%
January 1, 1913 December 1, 1914 12 -35.81%
July 1, 1981 November 1, 1982 12 3.93%
January 1, 1910 January 1, 1912 19 -16.25%
September 1, 1902 August 1, 1904 21 -20.77%
August 1, 1929 March 1, 1933 21 -85.01%
May 1, 1923 July 1, 1924 22 -0.98%
April 1, 1960 February 1, 1961 24 5.42%
October 1, 1926 November 1, 1927 27 13.75%
May 1, 1907 June 1, 1908 33 -11.32%
November 1, 1973 March 1, 1975 36 -20.63%
November 1, 1948 October 1, 1949 37 -2.97%
August 1, 1957 April 1, 1958 39 -12.00%
August 1, 1918 March 1, 1919 44 6.03%
July 1, 1953 May 1, 1954 45 18.55%
May 1, 1937 June 1, 1938 50 -36.65%
January 1, 1980 July 1, 1980 58 5.78%
December 1, 2007 June 1, 2009 73 -34.50%
February 1, 1945 October 1, 1945 80 19.15%
July 1, 1990 March 1, 1991 92 0.37%
December 1, 1969 November 1, 1970 106 -5.84%
March 1, 2001 November 1, 2001 120 -11.35%

In this perspective on the coincidence between recessions and the performance of the DJIA, we can plainly see that there is a 63% coincidence.  Overall, not a bad amount of coincidence.  However, we think that we can generate an outcome that is closer to 100% coincidence if we twist the data to fit our agenda.

There is a saying that “the stock market is a leading indicator for the economy.”  We promise we didn’t make this up. Furthermore, we have quoted the venerable Richard Russell of Dow Theory Letters fame to prove our point.

"The stock market is an indicator for the economy, a leading indicator (Russell, Richard. Dow Theory Letters.  October 4, 1967. page 2.).”

"Just as [Elliot] Janeway senses new leading indicator of the business-market condition, I too, often sense an index which I feel should be accorded great authority. Right now I would say it is world stock exchange averages (see last Letter). The leading stock markets of the world are now heading down in earnest (statistics in Barron's each week), and this has an ominous ring to it (Russell, Richard. Dow Theory Letters.  August 29, 1973. page 6.)."

"...if you believe that the market is its own best leading indicator then you have to believe what this market is saying (Russell, Richard. Dow Theory Letters.  September 19, 1984. page 2.)."

"I continue to remind my subscribers that the crucial issue here is NOT whether the CPI turns up or down next month, it’s NOT whether the leading indicators blip up or down in July. No, the critical issue here is the direction of the primary trend of the stock market (Russell, Richard. Dow Theory Letters.  June 8, 1994. page 2.)."

For nearly 6 decades, Richard Russell impressed upon his readers that the market leads the way when it came to understanding the direction of the economy.  Naturally, William Peter Hamilton, fourth editor of the Wall Street Journal, had the following to say about the insights of the stock market:

“The market is not saying what the condition of business is to-day. It is saying what that condition will be months ahead (Hamilton, William Peter. The Stock Market Barometer. Harper & Brothers. 1922. page 42.).”

Not to be outdone, Charles H. Dow, co-founder of the Wall Street Journal, has the following to say about the stock market as a leading indicator:

“The stock market discounts tendencies. Stocks went up before the improvement in business became pronounced.  Stocks will discount depression before depression actually exists, but this discounting quality in stocks make them run to extremes.  They discount shadows as well as substances and often anticipate that which does not occur (Dow, Charles H. Review and Outlook. Wall Street Journal. May 10, 1900.).”

We have spanned over 100 years of claims that the stock market is a leading indicator for the economy.  If this is true then we can then surmise that any of the years where the NBER called for a recession, the stock market had already embarked on a meaningful decline and if the data somehow shows a gain in stocks from a peak to trough period then it is because the decline and subsequent recovery was already in place.

Let’s see if the years when the DJIA registered a gain in the period from peak to trough of a recession was already preceded by a decline in the Dow Jones Industrial Average.

Evidence of Market Coincidence preceding Economic Reality

NBER peak NBER trough DJIA date DJIA peak DJIA date DJIA trough % change
July 1, 1981 November 1, 1982 4/27/1981 1,024.05 8/12/1982 776.92 -24.13%
April 1, 1960 February 1, 1961 1/5/1960 685.47 10/26/1960 566.05 -17.42%
October 1, 1926 November 1, 1927 2/11/1926 162.31 3/30/1926 135.20 -16.70%
August 1, 1918 March 1, 1919 6/8/1917 98.58 12/19/1917 65.95 -33.10%
July 1, 1953 May 1, 1954 1/5/1953 293.79 9/14/1953 255.49 -13.04%
January 1, 1980 July 1, 1980 2/13/1980 903.84 4/21/1980 759.13 -16.01%
February 1, 1945 October 1, 1945 3/7/1945 161.52 3/26/1945 152.27 -5.73%
July 1, 1990 March 1, 1991 7/19/1990 2,993.81 10/11/1990 2,387.87 -20.24%

Of the eight periods when there was a positive change in the DJIA within the defined NBER recession, five of them had already experienced a decline and recovery which explains why there was a positive result in our initial review.

The remaining three periods declined after the NBER recession had already started.  However, each of the three DJIA troughs occurred before the end of the NBER trough.  In this respect, even in failure, the stock market managed to fulfill half of the market bromide.  This means that 93% of the dates provided by the NBER since 1900 for both recessions and expansions were led by stock market changes in conformity with the later call in the economy.

Conclusion

In our simple coincidence evaluation, we found that only 17% of the periods did not conform to the idea that stock markets coincide with recessions and expansions.  Somehow, all available data suggests that expansions in the economy are perfectly aligned with stock market increases.

When ranked by the length of the recessions, there is a clear majority of recessions that align with declines in the DJIA.  However, the minority of recessions that show DJIA gains is somewhat confounding.

However, when we recognize that the stock market is a leading indicator for the economy, we find that the remaining 17% that don’t conform to the theory that the stock market is a leading indicator for the economy shrinks to 6.52% when accounting for the fact that market gains during a recession result from the market having recovered in advance of the recession low.

Dentsply Sirona: Dodging Bullets

Review

On February 6, 2017, we took a position in Dentsply Sirona (XRAY).  Dentsply Sirona is a leading manufacturer of dental products provided to dentists throughout the world.  By February 8, 2018, we said the following of XRAY:

“At the time of the purchase of XRAY on February 6, 2017, we sold our shares of UNM Group (UNM) which had increased exceptionally from the February 5, 2016 purchase.  XRAY did not meet our goal [gaining +1.14%] and while UNM has gained +5.19% in the same period of time.”

On February 8, 2018, we sold our holdings of XRAY and the stock has subsequently declined –31.30%, a staggering loss in such a short period of time.

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Downside Targets

According to Charles H. Dow, co-founder of the Wall Street Journal, a stock should be viewed from the context of when it last performed the worst.  Dow has the following to say (emphasis ours):

"The point of importance for those who deal in industrial stocks is whether the capitalization of the companies into which they propose to buy is moderate or excessive, when compared with the aggregate earnings of the various concerns forming the combination in a period of depression. It is probable that consolidated companies will be able to earn as much in the next period of low prices as the companies forming the combine were able to earn in the last one; hence the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowances for economies under consolidation. Where the earnings so shown would have provided dividends for industrials now active, the fact must be regarded as a very strong point in favor of those stocks (George W. Bishop Jr., Charles H. Dow: Economist, Dow-Jones & Company,Princeton, 1967, page 11.)"

Without seeing the reported earnings, dividends, debt and shares outstanding, the price of the stock is the best quick take on the downside risk.  In theory, the price reflects some or all of the news and fundamental data on a given stock.  Looking at the price and applying the work of Edson Gould, we have estimates for the downside target.

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Dow 50k by 2023? How about 177k by 2032?

In a USA Today article titled “Dow hitting 50,000 by 2023? Market milestone is within reach, investor claims”, money manager Charles Lemonides says, “…investors ‘should build their portfolios recognizing Dow 50,000 is a real possibility’ by 2022 or 2023.”

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This prediction sounds spectacular and harkens back to our January 3, 2018 article titled “Dow 130,000 by 2032.”  That article was premised on our November 2012 article suggesting that the secular bear market would end between 2016 and 2023.  After further analysis, in March 2013, we concluded that “…If the current implications are correct, we could be on the cusp of a run to Dow 100,000.”

What stands out about Lemonides’ forecast for the next five years?  While we were projecting a +12% compounded annual growth rate, Lemonides is forecasting a +15.09% compounded annual growth rate over the next five years.  If the +15.09% growth rate is projected out to 2032 then the Dow Jones Industrial Average would sit at 177,200.