By Mazhar Mohammad
“Many shall be restored that now are fallen and many shall fall that are now in honor” Horace
The relentless up move in the Global Financial Markets (GFM) is nothing short of an enigma to the analyst fraternity as the rally has gone beyond their understating mainly because of the earnings or future growth prospects, in their opinion, fails to justify the current prices of asset classes across the globe.
But, defying their logic, markets are hitting new highs day in and day out across the developed world including some emerging markets (EMs) under the stewardship of ‘Papa Dow’.
To understand and decipher this phenomenon we dig out the historical patterns from the year 1900 on Dow Jones Industrial Average. Interestingly, we found that the honor of developed markets is only getting restored as aptly put out by the Roman poet Horace in the quote as shared above.
There is a section of Global Analysts among Chartist fraternity (including myself as a Chartist) who believe that real major top for Dow Jones was registered in the year 2000, but not in 2008, after almost a two-decade long bull run from the lows of 730 witnessed in 1980.
Since then, up to the top of 11750 registered in 2000 Dow multiplied itself by 16 times. Interestingly, since 1980 there were only 3 individual years up to 1999 in which Dow closed in negative terrain with a cut of around 20% from the respective yearly top.
Only post-2000, this index witnessed 3 yearly negative closes with a hit of 38 percent from 2000 top. However, both time wise and price wise a correction post roaring bull market of twenty years can’t end in just 3 years.
If the correction, ends in 3 years then it should swiftly move beyond 2000 top of 11750 and multiply above that in a short period of time.
But, unfortunately, the rally from the lows of 7,197 registered in 2002 looked like a corrective upward rally as it slowly crawled upwards in next 5 years only to perish at 14,198.
In simple words, this up move from 2003 lows of 7197 was a small bull market inside the bigger bear market which was in force from the highs of 2000 and was trying to digest the gains of twenty-year-old Bull Run from the lows of the year 1980.
This is the prime reason why the majority of the developed markets gave up 100 percent of their gains witnessed from the lows of 2002 post-2007 correction.
In this case, Dow went below 7197 to bottom out only at 6469 thereby completing 9-year-old bear market which is justified after a two-decade big bull run of the 1980s.
In the Elliot Wave terminology, this corrective pattern from the highs of 2000 is clearly looking like an Expanded Flat whose final leg Wace C unfolded from the year 2007 highs which will end only after erasing 100% gains of preceding leg of the up move.
Another argument to support that the rally from 2003 to 2008 is a part of the bear market rally is that seldom bear markets erase 100 percent of the gains of its preceding bull market.
In the entire history of Dow Jones, there was only one occasion in which 100 percent of the bull market gains were erased. That is during 1929 crash when indices erased all the gains of a strong bull market started from the lows of 64 in the year 1921 and went on to bottom out at 41 in the year 1932.
Hence, it is a natural corollary that strong up moves in the market are followed by strong corrections and vice versa. Interestingly, to corroborate this point if we go back further into history before 1980 then there was a big bear market for 15 years since 1965.
And this was a period which has tested the patience of investors which led to even questioning the very existence of Joint Stock form of company structure and some experts started writing obituaries for this kind of company structure in the 1970s.
From this kind of pessimism, a two-decade-old bull market was born in 1980 which lasted for 20 years.
Similarly post-subprime crisis there were many voices which were trying to write an obituary for stock markets of developed economies but Mr. Market smartly went on to nourish himself on this schism thereby becoming stronger and stronger and it clearly looks that Dow has a long way to go if history is anything to go by.
What about Indian Markets:
India as a country has to grow irrespective of the party in power owing to its inherent strengths like favorable Demographic profiles and increasingly educated population.
Added to this, favorable economic legislations to address macro issues shall benefit the economy going forward. Hence, the TINA argument appears to have lost its glamour as liquidity is chasing markets across the Globe but not India alone which is pretty much part of the Global Rally.
As the outlook for Dow is looking very strong with a new and energetic bull market in place from the lows of 2009 that too after a 9-year-old bear market the rally is here to stay for a longer term across the Globe.
Disclaimer: The author is Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.