Where Next For The Dow Jones Stock Market Index?

By: Andrew_Butter

Round numbers I'm calling the intra-day high on the Dow of 9,938 on 23rd September as a "hit", that's within 1% of where my model in May said it would reach without any mishap (http://www.marketoracle.co.uk/Article10604.html).

So now that's clear, will there be a mishap? A 350-point drop on the Dow over less that a week isn't quite a mishap, but another 500 would qualify.

What's difficult to call is that long-term interest rates have been bouncing around like a yo-yo, which is not something that happens every day of the week. The way I read the dynamics of what happened goes like this

1: The fall in stock prices in September precipitated a "flight to safety", which increased demand for long-term Treasuries.

2: So yields dropped through the floor, nominal other than market valuations went up.

3: That helped to stabilize the stock market.

4: Then yields started to go up as people started to recover from the shock, nominal valuations went down.

5: Then the market went down to where it should have gone in the first place if the temporary plunging yields had not acted as a break.

6: Then the bottom was in and so the only way was up.

This is a chart with monthly average for all that on the S&P 500:

What surprised me was the speed of it, going down OK, that always happens fast, but coming back up, I didn't expect Dow 10,000 territory until the end of the year earliest.

Going forwards six months to a year it doesn't really matter what happens to the economy, worst case nominal GDP growth might be as low as 1%, no reason to believe it will be more than 4%. That won't make much difference to the base line either way, and the direction medium term is back towards the baseline.

The "conundrum" is the 30-Year yield or 10-Year if you like (not a lot of difference).

My view which is a distinct minority is there is a danger that long-term yields could be heading up towards 6% (http://www.marketoracle.co.uk/Article13867.html), Bill Gross obviously thinks different and he is apparently is all smug having bought 10-Years at about 3.9%.

If he's right, and they stay down, (and certainly right now the argument for deflation short to medium term is convincing), my view is the S&P 500 will drift up towards 1500 over the next year [7], if he's wrong well the base-line could go down to 1,000 [8] which could drop the market back to 800 temporarily [9].

The advice I'm giving my clients is better to be safe than sorry, and so what if you sit on a lot of cash for the next six months to see how this plays out, if you caught the rally great, if you missed it, well you missed it.

I'm not totally convinced what happened over the past six months wasn't just the eye of the storm; too many things are still not resolved, no one figured out how to value toxic assets, no one knows if the banks are solvent, no one really knows what the Feds doing, one other worry is if rates stay down what will happen to the dollar? I suppose the next question if you are parking cash is where to put it?

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
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