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Saturday, April 20, 2024

110 years of Dow History Reveals a Little Secret: Volatility Is Normal

Courtesy of Doug Short.

As mostly a gold and equities trader, I have since 2009 (a late bloomer, I know) grown used to using a limited number of key market instruments to build a weekly health check on the equity market synopsis. Back then, I was delighted to discover Doug Short’s analysis of US data, particularly what has now become a comprehensive piece entitled Market Valuation Overview. With this knowledge, I recently completed a comprehensive ECRI WLI analysis, which both lead me to think we have similar conditions to 1970 (based on both analyses). Another chart I use for broader sentiment is the long term DOW/Gold ratio.

I began to cross correlate a large number of charts and data that I have collated over the past 2 years, but in keeping it simple, a repeating pattern of similar periods have recently become evident. The DJIA chart below is the result of compiling a complete historical diary of major events around the DJIA index from 1896 to 2012. It explained the clear difference to me in what was an equity only event in 1930 to a gold only event leading up to 1980 (explaining key aspect changes in the DOW/GOLD ratio over time).



What struck me first from the DJIA historical chart above was how many periods of sideways range bound movement had the same volatility (see note below). It showed the 2007-2009 peak to trough was the same in each instance of 1915, 1940, 1975. The real kicker was discovering the trough of 1932 to peaks in 1966 and 1973 lead to repeating ranges in 2008, and ‘possibly’ higher into 2015. The first range of 33.5 years was near enough to exactly repeat itself (hit the value, but peaked slightly early). The second range of 40.5 years is looking promising to date with an upside target of 14090 on/before May 2015.

However, these peaks previously occurred during a 16 year period of range bound equity performance (in nominal terms). As is plainly evident, there are a multitude of prevailing global conditions that indicate no immediate end to the present turmoil, and the DOW history above suggests a possible sideways churn extending out to Dec2015. So even if the second range eventuates to complete at 14090, there is a period of downside risk remaining based on historical precedence. Also note the containment box does not necessarily imply a lower bound.

Note: On a log chart, a box having a fixed vertical dimension has the same ratio of value from top of the box to the bottom when placed anywhere on the log chart. In this case, 43% is the volatility, meaning the price at the bottom of the box is 57% the price at the top of the box. For more on this, see an upcoming extensive market synopsis incorporating this chart, DOW/Gold, and more charts on my blog http://atradersrant.wordpress.com (due out next week).

(c) Peter Williams





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