Thursday, January 7, 2010
DJIA, VIX and valuations
Lets take a look at the Dow Jones Industrial Average. As you can see, it is right up against the downtrend line from October 2007 when the Dow made its all time high at 14,198.10. This is no time to be buying stocks, it is the time to be safe. We are in a secular bear market, and if you are familiar with Elliot Wave theory the next big move in the market could be a decline of super cycle degree. After all is said and done, the Dow could be at 1,000 or below. Yes, 1,000. Don't listen to Cramer and others on CNBC and the media telling you this market is cheap. By NO means is it cheap. the S&P 500 P/E ratio is currently floating around all-time record levels. Unless earning soar, Prices have to fall to MUCH lower levels to get us back to bear market bottom territory. If you stay liquid, in SAFE cash equivalents, you will have your wealth safe to snatch up the bargains of a lifetime. A great book to read about this is Robert Prechter's book "Conquer the Crash: You can survive and prosper in a deflationary depression", in which he outlines exactly how to stay safe during this bear market so that at the bottom you will have a good portion of your wealth in tact. Back to the market, the preferred count at this time is that we are in an ending diagonal, which is a pattern that completes moves, and often leads to violent reversals once complete. Another indicator that is showing a sign of complacency in the market (and from a contrarian standpoint a sign of a reversal) is the CBOE Volatility Index (VIX), a measure of fear in the market, Shown above in Chart 2.The VIX is at levels not seen since before the 2008 crash. There is positive divergence developing on the weekly time frame, indicating a bottom is near. Stochastics, a measure of overbought or oversold conditions, are at extreme oversold conditions, indicating a turn up in the VIX is near. When the VIX starts to turn up, the initial move should be swift, along with a precipitous selloff in the market. This would likely indicate the bear market rally is over, and Primary wave 3 down should begin.