We are Doomed
So the pundits tell us anyway. But I don’t think so, at least not yet.
The lower shoulder of the large green candle in July is our first support level at 155.90 on the DIA. The DIA is an ETF proxy for the Dow Jones Industrial Average. The Keltner Channel (green wavering line) is the next support at 159.63.The next level is the 200 SMA (Simple Moving Average), the white line just under the last candle at 157.35. Finally we have the tail of the July candle at 150.57.
It has certainly been a memorable opening of 2016 for the U.S. stock markets. We are currently down about 1600 points on the DOW from the close in 2015 and almost 2400 points from the high last year. We are certainly in correction territory.
The U.S. markets are closed Monday for MLK Day but the rest of the world goes on. China, which appears to be the biggest problem for the U.S. markets, has another big round of economic reports on Monday so the market will open on Tuesday to (probably) more bad news. If the market gaps down to the 155.90 to 150.57 area we should get a nice rebound and a green day.
On the DIA daily chart above notice that the last two candles are green even though there was a big gap down on Friday. For me this indicates the shorts are weakening and the longs will take control soon. Whether the Chinese data on Tuesday turns the markets around or not we are near the bottom of this move now.
If we don’t penetrate 150.57 we could go back to the 17500 area on the DIA. If we do penetrate 150.57 then look for a 50 % retracement with a fall to 14000 area if 50 % is not achieved.
The S&P 500’s current P/E is 21.04 per the Wall Street Journal. In a good growth environment this would be expected, but with low to no growth or even negative this is 25 to 30 percent to high. Over the next six to twelve months I expect this to correct to the norm or farther.
The year of a crash in the market the S&P P/E spikes to two or three times the prior year normal levels because profits are dropping swiftly. In normal years the P/E runs between 7 and 25. We are in the high end of this range right now. I expect the S&P P/E to fall to 9 or 10 in the next two years. That translates in a 55/60 percent drop from 5232 or 3140 points with a low near 2100. If you can’t go short, this would be a good time to be on the sidelines. The reason for such pessimism is the Federal Reserve support for the markets is being withdrawn now and that is what drove this market to these levels.
The second reason for pessimism is the upcoming presidential election. If the republican / conservatives win they will cut liberal programs and that will dry up a huge spending source in the economy. If the democrats / socialists win they will drive the country into bankruptcy and disincentivizes people from working for a living. Either way, the equity markets are screwed.