I’d like to let you in on my most recent analysis that has me even more convinced we’re in for a major slide in the future. First condition yourselves… I’m recommending you look at the market with a longer time horizon than is typical. Trust me that this longer term analysis can be very revealing and informative. With that view in mind, I believe we may be looking at a DOW multi-year head and shoulder pattern that started in around 1990… (Maybe a little earlier)

Take a in-depth and long term look at the DOW and what you may begin see is that the last 10 or 15 years with the DOW peaking over 14000 was an aberration. FYI, here’s a chart that starts to get at what I’m observing (hint: turn on the max year view). BTW, it’s important to note how the scale on this chart changes… it’s very deceptive, but the data is still there.

http://finance.yahoo.com/echarts?s=%5EDJI#chart3:symbol=^dji;range=20050707,20100630;indicator=volume;charttype=line;crosshair=on;ohlcvalues=1;logscale=on

Now, here’s an older web site that includes a straight line chart ending in 12/04…
http://bigpicture.typepad.com/comments/2005/12/100_year_bull_b.html

Revealing huh…? If I’m right, the market’s really started to go off-track back in the Clinton era. We were going along growing at roughly 10% appreciation per year…and then along comes the huge year over year increases which can arguably be seen as the “aberration”. Why did we have this aberration…? IMO, two simple reasons: 1) the huge influx of new 401K money (millions of ‘new’ small investors plowing automatic payroll contributions into their 401K’s with employer matching) and 2) the repeal of the Glass Steagall act in 1999 which resulted in unprecedented risk and leverage. Both items had the effect of fueling a huge bubble that we can only properly see if we allow ourselves to stand back and take a multi-year view.

Looking forward, I believe we need to assess the impact of millions of people putting the brakes on their 401k and 403b contributions. Furthermore, aging baby boomers will begin a draw down of what remains of their 401K portfolio just to make ends meet. Compound this with still to unfold de-leveraging and the over 22% unemployment (counted the same way as in the 1930′s- see shadowstats.com) and it paints a pretty grim picture for the long-term future of stock prices (By the way, I’m expecting a near term rally).

Add to this the surging debt levels (here and abroad) and we may be looking at a game changing scenario. The long term head and shoulder pattern I referenced really does seem to be in play. It may take a few years to complete, but if it does materialize, were possibly looking at a DOW at or below 4000…! (For the record, a retracement of the great depression would translate into a DOW bottom of 1550). Today’s investors are trying to navigate within what may well be an aberration…I’m becomming increasingly convinced there’s no way it’ll work.

So, what should we do? First, feel free to argue with me and tell me I’m crazy (but please do it with facts and solid analysis). Second, start to assess your holdings with this view in mind and the paradigm that we may need to begin thinking the unthinkable. If you’re in cash begin to assess what happens if money markets again break the buck or the FDIC fails or if we have a currency crisis [Note the UN recently recommended moving away from the USD as the World's reserve currency])

If you’re in Gold, consider the possible impact of deflation and the actions of a desperate government (research what was done in the 1930′s…)

Good luck to all.

- PAretiree

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