Dow Monthly and Daily Charts after Today's Fall

Dow Loses 300 points Thursday, Makes Recovery, and Long Term Investors Who Haven't Sold in the Recent Panic are the "New Contrarians"

Earlier today I wrote a post on the Motley Fool board, "Macro Economic Trends and Risks" in which I "fessed" to being one of the few investors who hasn't been busy "churning" my account, trading in and out, like a nervous jackrabbit during the recent swoon in the Dow.

Yesterday, I posted a chart of the Dow in daily form.

Today, I post a new chart with the latest "Japanese Candlestick" now showing on the same chart.

(The daily chart I am talking about is the second of the two posted above.)

A certain trend reversal formation has formed on the daily chart. It is called a "hammer". The hammer is classified by a tiny "head" on top of a long "shadow". (Someone once described to me a "hammer" as looking more like a hatpin.) What this particular candlestick tells investors is a trend was decidedly "bearish" in a session, with the later part of the session turning bullish.

Notice on this daily chart that the "head" of the "hammer" closed above the 200 day moving average line AND my trendline. Although my trendline has now broken down (using Japanese methods of drawing trendlines NOT Western methods) I am still "bullish".

Which leads me to point out to Nervous Nellies who've been selling their Blue Chip Big Cap stocks in the face of what seems like an Armageddon event:

The Dow Monthly chart is still hale and healthy.

Look at the monthly chart (the top chart of the two).

That Dow chart shows a 25 year old trendline.

That's 25 years of 12 candlesticks per year showing the 1987 market crash and the 2000-2003 bear swoon including the dot.com meltdown and 9/11 and its bear aftermath (which reset the trendline to a less severe rate of rise).

Now I want to point out something to many of you out there.

My longterm trendline for the Dow starts out at 769.68.

That low for my trendline took place in August of 1982 . . . so we are talking exactly 25 years ago this month.

Next, I want to do a mental exercise where we shoot down a few hyper-ventilating Armageddon Sell analysts who are telling everybody to sell everything in the recent sell off of the Dow.

1. First, let's think about the Dow.

It's a weighted average of 30 of this country's greatest companies. It's the oldest "index" for the NYSE, or New York Stock Exchange.

Names you know, such as Verizon, Johnson and Johnson, Exxon, are all members of this Index. And these names, for the most part, have been neglected by buyers of stocks since the dot.com bust in 2001.

Big Cap Blue Chips have sorely "underperformed" the overall markets as I've pointed out in earlier posts on this blog.

To make money in any kind of investing, you must buy dollars for .40 cents. Go where the herd does not tred.

Hence, I think a "flight to safety", i.e., Big Cap Blue Chips, is exactly the kind of move all risk adverse investors should be making in these trying times.

Onward.

2. Using 770 (rounded off 769.68), most investors will look at that number and say "Aha, the Dow has gone up about 16 times in 25 years . . . therefore it is way overbought."

However, let's look at this 770 start point and double it.

That gives us 1540. The Dow first hit 1540 in January of 1986.

That's like 3 1/2 years for a double. That is above the "normal" mean where we seek to "double" our stocks's values every 5 years.

{Dr. Jeremy Siegel points out the 100 year average for S&P 500 type stocks is about 11% per year which would be a "double" every 6 1/2 years; however, through proper timing of your buys, I, Warren Buffet, and even Dr. Siegel firmly believe . . . and have empirical knowledge . . . that many investors can expect "normal" average returns of 13-14% and better. Meaning that I expect to "double" my stocks's gains (with dividends reinvested) every 5 to 6 years.}

Anyway, let's get back to our exercise.

So we hit 1540 sometime in January in 1986.

Our next double of 3080 takes place in December of 1992. Okay, instead of 3 1/2 years, this next double takes about seven years, from January 1986 through almost January 1993.

So, stay with me, the Dow doubled twice in 10 1/2 years total, right?

Our next double would be 6160. When did that take place?

This next double of 6160 took place in October or November of 1996.

This was our quickest "double" of the Dow yet. It took a little less than 3 years to take place.

Now, let's do one more "double".

We are looking for the first appearance of 12,320.

Guess what? This double took the longest of all, almost ten years exactly.

Look for yourself at the monthly chart. This new double of 12,320 took place in October or November 2006 . . . ten years after that last double in October or November of 1996.

So the Dow has doubled four times in the past 25 years.

Length in time for the Dow to double those four times in 25 years . . .

First double: 3 1/2 years

Second double: 7 years

Third double: 3 years

Fourth double: 10 years

Take Away on the above observation

If we are using a 25 year old chart of the Dow, then the next double of the Dow . . . 24,640 . . . will probably take place in less than five years if . . . I said IF . . . historical "norms" continue through thick and thin times.

The only thing to destroy my outlook would be a Worldwide Depression.

And if a Depression comes, I'm still not selling off my stocks which I've bought at undervalued prices.

As I said in a Motley Fool message board post today titled Contra Thoughts from Accused Perma-Bear . . .

I'm looking over my charts right now.

I'm seeing banks, many REITs and the currencies showing contra-moves against the overall markets. The Bank Index is up almost 4% today.

It's like the financials are expecting a "Greenspan Put" from Bernanke or they know something we don't know. (I still am too nervous to buy financials outright, although Bank of America is tempting me.)But, I'm not looking at financials as a buy as I don't trust their "off book" investments are doing.Hence, I am looking over other sectors.

Consumer staples are also doing very well in these down markets.

But it's not only that sector.

You can find a good bunch of Blue Chip dividend payers to start buying into today.

According to a great Barron's piece 8 weeks ago, the record margin is almost all hedge funds, mutual funds, etc. It's not us small investors getting the margin calls . . . unless . . . of course . . . you used margin on your own or you invested in a fund which relies on leverage.

Despite all the turmoil, my ports are still up for the year and dividends paid within the past two weeks are buying much larger hunks of fractional shares in solid companies which will not blow away in any market tsunami.

People got to eat, use gas, buy electricity.

Invest accordingly.

Call me crazy, but I believe now is a great time to begin buying Proctor and Gamble, Johnson and Johnson, Pfizer, Huaneng Power etc. Average up, average down. Let those dividends reinvest.

It seems everybody's on board the downbound train. Yeah, we know Kudlow and crew are perma-bulls, but like posters on this board have said about perma-bears (which I've been incorrectly called), even a broken clock is right twice a day.

This is a classic time, IMO, to start taking the contra view of seeking good solid companies whose shares were sold off by funds so the cash could pay off riskier losing bets elsewhere.

I'm not suggesting you go hog wild and throw all your dry powder into the markets today. I am simply suggesting you look over those great companies which you've been hoping would come down in price for an initial buy.

Buy some now.

Maybe the markets will continue down. Maybe not. Average down. Average up if the markets take off again.

Warren Buffet has to be going nuts with his cash buying cheap shares of his favorite companies. I know he recently doubled down on Johnson and Johnson. I can't wait to see where he's feasting while big players run for the exits.

Maybe September 15th will be the bottom via ajaskey's (note to blog readers, ajaskey is the alias of a regular Motley Fool poster) Gann Theory. And then maybe not.

Maybe the Dow will drop below it's longterm trendline breaking the y axis at 12,000. Maybe not.

Trying to time a perfect bottom is tricky business. It takes a lot of monitoring of LIVE software, charts and news to jump in and out of positions like a nervous jackrabbit.

I say everybody here should be rotating into solid great companies, begin sleeping like a baby, and go fishing.

The clouds we saw on the horizon in 2005 and which were ignored by 99% of investors are now storms taking out people stuck in the door jambs as the flood surge rushes above their heads.Don't lose yours to panic selling.

Use this time to begin buying where others fear to tread.

p.s. I think another 5% fall on the Dow is doable. I feel another 10 to 12% fall on the S&P is doable and would be good. And a 30% to 40% drop on the NASDAQ would not freak me out. But I could be wrong and all of my trendlines taken out by some major catastrophe like a Great Depression. So what do I do? Go live in a hole with an AK-47 and wait for Doomsday?

Nah, I bought great companies over the past four years and all of them will hit the "Return Accelerator" with their DRIPs if their shares fall dramatically.

Moreso, I believe there will be a natural flight to safety on great Blue Chips which have been the most neglected stocks of the past 10 years. A lot of my port is diversified into these great companies and I'll be buying more.

Just because I am still bearish on Housing, doesn't mean I can't see bargains in Housing developing. It's just Housing markets move much much slower than stock markets. Today, I see many real bargains in the stock markets. And obviously Warren Buffet, Bill Miller and Anton Van Den Berg see these same opps too.

This is a time for Value Investors to shine.

(end of Motley Fool post)

As I've state before, there is always something "on sale" in the stock market.

If you know your history, if you've read Dr. Jeremy Siegel's book "The Future for Investor's" and you grasp the beauty of compounding dividends through dividend reinvesting, and you buy quality companies when no one wants them . . . you too shall thrive while others are losing their minds jumping from one mania to another.

You remember the first official stock pick of this blog, Johnson and Johnson? While the Dow has lost about 10% in two months, JNJ is still at or close to our buy in point of $63.41.

In fact, JNJ dropped at one point in July to $59.72 low. During the June 15th through July 15th recording period for Insitutional buying, Warren Buffet doubled his position. During the recording period of July 15th through August 15th, Warren Buffet increased his position another 9.21% with a total holding now of JNJ stock showing 53,145,848 shares worth $3,257,840,000.

Mr. Buffet is wading in when others are fleeing in panic.

The smartest investor of all time has other companies he's buying . . . and several of these shall be discussed in upcoming blog posts.

Meanwhile, I assure you, Johnson and Johnson . . . despite the recent failings of its stent business . . . is a booming healthcare/consumer staples macro play. When you see the new "Band Aids" with Neo Sporin gel being advertised, that's your baby. When you see the new "Listerine Mouth Whitening Strips", that's your company too. Johnson and Johnson's consumer staples division has caught fire, and they are going to give Proctor and Gamble, Colgate, Unilever and others a run for their Consumer Staples bucks . . . just wait and see.

When you buy "safety" when it is extremely undervalued (as Johnson and Johnson, Proctor and Gamble, Pfizer, etc., are today) rewards shall be reaped by the patient.

Action to take: keep buying Johnson and Johnson and other quality Blue Chip Big Caps which will not blow away during any major Armageddon event.

As always,

Caveat Emptor

Rock

Mortgage Backed Securities Going Up in Flames: Burning Down the House

Wall Street Bankers to Lesser Mortal Homeowners:

"What, Us Worry?"

It’s time to travel the Watchworld to see what other watchers of the Liquidity Crisis and the Housing Crash are seeing from their perches looking down . . .

I think I will do this exercise more often . . . whereby I open three or four random links on my blog's margins . . . and see if I can thread them together as a mental exercise which might enlighten and educate.

So, let's get on with it.

From Jim Kuntsler’s Clusterfuck Nation latest “Margin Call”

“What you're seeing now is a simple matter of financial sector players trying desperately to evade the consequences of their own actions. The fake wealth generated by the synthetic securities they created is now being recognized for what it is: a swindle. The hallucination is over. The collective denial that supported that hallucination is dissolving. The losses are become manifest. Even worse, the losses are growing exponentially because the synthetic securities were used as collateral to leverage far greater multiples of "positions," bets, and plays in a casino-like global electronic trading arena.

This is what happens when investment gets de-coupled from real productive activity and becomes an end in itself. It has been terrifically enhanced by computer programming. But no amount of digital legerdemain --with the "sugar-on-top" of accounting trickery -- can now hide the fact that there is no "value" there. What's more, the losses are going to have to show up somewhere. If you try to suppress them in one area, they'll pop up in another. If the Federal Reserve tries to cover the losses racked up by the Big Fund Boyz by giving "cash" away, they'll only succeed in destroying the value of the cash itself, i.e. the US dollar.

The upshot is that we are going to find ourselves a poorer nation. There will be far fewer people with money. There will be far fewer buyers of repossessed McHouses, bass boats, etc. Even the houses in Sagaponak and the Manhattan apartments will go cheap. The effort to pretend our way out of a financial crisis will fail. Sooner or later the recognition will set in that all that "boo-yah" was dreamed up. The United States swindled itself. We became a nation of such greed-crazed clowns that we committed financial suicide in an orgy of self-deception.”

Whew. Don’t hold back, Jim. Tell us how you really feel.

From KRCA News in Sacramento, CA, we get this enlightenment about how the Housing Crash is playing out in California:

“A new report says Stockton's foreclosure rate is the worst in the country, and Sacramento is not far behind.

Foreclosures have skyrocketed in California, Ohio, and the Northeast. Nationwide, there are about 600,000 properties in foreclosure. By the end of the year, 1 million properties are expected to be in foreclosure.

Stockton isn't alone with this dubious distinction. Sacramento is No. 5 nationwide, Fresno checks in at No. 14. Oakland is No. 19 and San Francisco came in at No. 78

Homebuilding in the Central Valley skyrocketed in 2000 and home prices doubled over a period of four years, thanks in large part to Bay Area commuters.

"It was a cheaper source of housing, the investors, there was a lot of greed in the market, everybody got very greedy, and everybody wanted to make a quick buck," said Matt Davies of Partners Real Estate.

Stockton now has the highest foreclosure rate in the nation, more than 8,000 foreclosures for the first part of this year, which is one foreclosure for every 27 households. This is a 256 percent increase compared to the same time period last year.”

One out of every 27 households is in Foreclosure in Stockton? Can it get any worse? I think so.

Foreclosures sold at auctions will further depress Real Estate in neighborhoods with high foreclosure rates. Homeowners still surviving on hopes and dreams want a return to EZ Home Equity Loans and Slam Dunk Refis. But that nastiest of all four letter words, D-E-B-T, is now now on everyone's tongue. No one will buy your debt off you if they can't afford or no longer qualify for "Liars Loans".

The Ponzi Economy is collapsing, and what is happening in California's Housing Market will surely be trumped by what is about to happen in South Florida.

In a Huffington Post from Eric Linden, we are reminded on the One Truth which American Schools need to drive into the heads of all students . . .

Credit is NOT Money

Or as Linden explains it . . .

“We are in the beginnings of the collapse of a fiat currency. Actually, it's the collapse of a type of credit that has been treated as though it was currency, but it's rise and fall closely mimics the natural history of fiat currencies.

Back in the 19th century banks would issue their own currency, backed by government bonds that would be held as security by the Treasury Department. Starting in the 1990s, financial institutions began doing something like this again, although this time around the currency has been the triple-A rated tranches of mortgage-backed securities (MBS) and collateralized debt obligations (CDO). And, while our forbears in the 19th century could assure themselves that a bank note was supported by the credibility of the U.S. government, this new currency was backed by the paid-for opinion of the rating agencies.

Assured by Triple-A ratings that these instruments were money good and completely liquid, bankers thought they had discovered the philosopher's stone -- a risk-free, high-yielding asset -- and this new credit/money has found its way into every corner of the financial system from teacher's pensions to commercial paper to money market funds.

Moreover, once the printers of this new fiat currency realized that there was an appetite for their product among yield-starved institutional investors, they did what every unrestrained ruler with a printing press has done since the dawn of money: they began minting more of it.
In this case, credit/money was inflated through the re-securitization of already securitized assets. The Mugabes of hyperinflation in this case were the rocket scientists in structured finance, and the Zimbabwian extreme are so-called synthetic CDOs, arcane confections which invest in tranches of CDOs.”

(Rock’s note: there is an excellent, easy to understand video in the next link explaining how crap Mortgage Backed Securities of the highest risk, i.e. sub-Prime MBS’s, were bundled and then sliced into five tranches, the highest being rated AAA. Trust me. This short video will finally click on a lightbulb in your mind if you’ve had trouble understanding how MSBs were packaged and sold off in “tranches”. When you master this concept of MSB’s being slided into tranches, and how through alchemy, very risky securities were suddenly turned into AAA paper, you are on your way to understanding how the Ponzi Economy is built on air.)

Continuing on with Linden’s post:

“These "innovations" leverage the underlying subprime assets to dizzying multiples so that tens of billions of dollars in subprime originations might ultimately support a trillion dollars in CDO tranches. At the tail end of this whip, tiny variances from the assumptions about the performance of the underlying assets can vaporize the value of these supposedly rock solid assets.

This new fiat currency exploded during the period of skyrocketing home price appreciation, but it should be noted that almost everything worked during that period. What securitizers and holders are discovering, however, is that a fiat currency rests on nothing more than the willingness of someone else to accept it. And, now that the market, most ominously the vast commercial paper market, has discovered that credit is not money, the contraction has begun. The question of the moment is whether anything can be done to slow it, much less stop it?

If the Federal Reserve lowers rates, it risks a precipitous fall in the dollar and a big rise in long term rates, which would only worsen the situation for over-indebted consumers and homeowners. Similar risks accompany other Fed strategies by which they might inject liquidity (the only reason that the euro did not fall more after the ECB's massive liquidity injection was that central bankers around the world were all doing the same thing).”

Most likely, the best we can hope for is an orderly blood-letting with pain apportioned where it is deserved. The device that might help accomplish that might be a public-private corporation (largely funded by the big banks that promoted and profited from this mess) set-up to exchange currently illiquid CDO/MBS tranches for tradable notes in the enterprise.”

Rock’s note: . . . and who will force these big banks to fund such an effort? The Big Banks ARE the banking cartel which has the Federal Reserve operating in their behalf. Any bailout will surely have banks and the government, i.e., We the People, bailing out the wealthiest members of our society who took on the most risk, in my opinon.)

Linden ends . . .

“This will not solve the many other problems attending this credit contraction (including counter-party risk in the CDS market), but it will buy time, and time is everything when bills come due. We've done this before (Felix Rohayton's creation nicknamed Big MAC calmed markets during New York City's financial crisis in the 1970s), and it will help supply liquidity and price transparency in this vast market. A fix like this won't much reduce the pain for either investors or overstretched homeowners, but it could reduce the growing risk of panic, paralysis and systemic collapse. It will also minimize moral hazard by doling out financial punishment mostly to those who deserve it."

To which I will ask, “Where is Elliot Spitzer when we need him most?”

Lastly, I will link you to an excellent short video of CNBC’s Power Lunch. This short video segment, titled “Burning Down the House”, is an outstanding explanation . . . with simple flip chart graphics . . . showing how Mortgage Backed Securities are packaged, sold, and resold again.

Steve Liesman, CNBC’s Senior Economics Reporter, also explains how you can take the worst “junk” paper, i.e. sub-Prime loans, and repackage them with a twist so they got AAA ratings with high returns (while the Housing market was going great guns) and how these AAA rating products are now prone to major blow ups wiping out billions in wealth.

As I have yet to learn how to post videos directly to my blog wit a big start button, I will simply ask you to click on the following red highlighted title of the video short’s title here: “Burning Down the House”.

Good reading, good viewing, and good thinking.

And as always,
Caveat Emptor

Dow Industrials Daily Chart About to Break Important Support Trend Line?

(click on image to enlarge)

Dow Daily Chart Shows Today's Close Right on Important Trendline and 200 Daily Moving Average

Just an observation of mine which I've yet to hear anyone pick up and discuss on Bloomberg:

Click on the above chart. When it expands, look at today's closing Japanese Candlestick. At one point during the afternoon, the low of the trading session touched the trendline for a "reconfirmation".

If we were bullish on fundamentals for a stock with a similar chart, this would be a bullish indicator to buy near a historic "mean".

However, as we are on the Edge of Panic in our stock markets, what we want to watch tomorrow is to see if this trendline is pierced tomorrow for a breakdown of support.

Notice, too, the red squiggly line almost in perfect rate of rise with the trendline. That is our 200 day moving average line.

The 200 day moving average is an important indicator. If the Dow falls below it and closes below it sometime this week, this will signal day and swing traders that the breakdown in markets is going to bring more pain.

In these markets, especially with housing, lender, banking and insurance stocks being hammered, this could be the beginning of a new more serious downturn in the markets.

This chart is for all my friends on Motley Fool's "Macro Economic Trends and Risks" discussion board which is now FREE to access. Come join us.