I don’t mean ‘abc’ swing patterns but rather the analysis in this ‘plain vanilla’ line chart of the Dow from 1975 to the present. Sometimes it is just good to stand back and see things in a simple way. This is a quarterly line chart (a big, big picture), to which I have added my own reference points A-F.

click chart for more detail
click to enlarge

Point ‘A’ is the level at which the DOW hovered for almost a decade – around the 1,000 level, despite experiencing a volatility of its own during that time.

Then we had a massive run up for almost 20 years to 1999 (Point ‘B’), followed by a three-year bear market down to Point ‘C’. After that we had a five-year dash to Point ‘D’, another correction to Point ‘E’ and a rapid recovery to Point ‘F’.

Let me start with point F. If the high of 2007 was a heavily overbought level (and I think that is a reasonable assumption considering the major rout that was to follow), what would have been a reasonable, fair-value level for the market at that time? I know markets don’t act all that rationally at times, but pardon me for musing: For the sake of the debate, let’s say ‘fair-value’ was around the 10,000-12,000 level. In 2007, we were in a so-called bull market, but the bubble was about to burst. I guess the latter part of that bull market was merely a perception of something that turned out to be very different.

So why is today’s market at a level not far from the 2007 high? At a time when we are at risk of another recession. At a time when western governments have incomprehensible levels of local and foreign debt and do not have the political ticker to sort out these time bombs. At a time when a boa constrictor is slowly choking the USA. Why?

I know we are going through an earnings ‘sweet-spot’ that is pushing equities up, but this cannot last if the western world has virtually static growth. Earnings are currently based on minimal revenue growth with costs (read job cuts) being squeezed to achieve growth.

Is it just loose money pushing equities higher, or am I delusional?

Enjoy the ride

Tom Scollon

Chief Analyst