Dow Drop to 6-Year Low May Spur More Losses, Chart Analysts Say
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By Eric Martin and Cristina Alesci
Feb. 20 (Bloomberg) -- The Dow Jones Industrial Average’s drop to a six-year low presages more losses for the 30-stock gauge, according to analysts who base forecasts on price charts.
The measure’s slump below its Nov. 20 low to the worst level since October 2002 means it will keep falling, according to a 19th-century analysis known as Dow Theory. Its adherents say that losses in the average worsen when the Dow reaches a low at the same time as the Dow Jones Transportation Average, which happened today and yesterday.
Concern the deepening global recession will force the U.S. government to take over banks sent the Dow to its worst weekly decline since October. The rout left the Standard & Poor’s 500 Index, the benchmark for U.S. stocks, within 2.3 percent of the worst level since 1997.
“The direction of the market is clearly down,” said Richard Moroney, who manages $150 million at Hammond, Indiana- based Horizon Investment Services and edits the Dow Theory Forecasts newsletter. “We’re holding a lot more cash than we normally do.”
Citigroup Inc. and Bank of America Corp. declined the most in the Dow this week, losing more than 31 percent, on concern shareholders will be wiped out through nationalization. General Motors Corp. had the third-biggest slump, losing 29 percent on solvency concerns. General Electric Co. dropped 18 percent to $9.38, becoming the fifth stock in the average to trade sink $10 since last year. The Dow decreased to 7,365.67 this week.
‘In Force’
Dow Theory, created by Wall Street Journal co-founder Charles Dow in 1884, argues that transportation companies are harbingers of economic activity. The transportation gauge slipped below its November nadir in January, and now trades at the lowest since September 2003. YRC Worldwide Inc. and JetBlue Airways Corp. fell the most this week, losing more than 27 percent.
Dow Theory is showing that “the bear market is in force,” said Philip Roth, the New York-based chief technical analyst at Miller Tabak & Co. “It doesn’t tell you whether it’s going to last another year or another day. It isn’t a forecaster of magnitude, just direction.”
In November 2007, one month after the Dow industrials and S&P 500 surged to record highs, Dow Theory suggested the rally was over. The S&P 500 went on to tumble 38 percent in 2008, the most since 1937.
$800 Billion in Spending
The Dow Theory forecast goes against all 10 Wall Street strategists tracked by Bloomberg, who on average project the S&P 500 will rise to 1,059 by the end of the year, a 38 percent gain from today’s close of 770.05. Almost $800 billion in federal spending and the cheapest valuations in two decades will spur the rally, the strategists say.
The S&P 500 is a better indicator of the market’s direction because it has almost 17 times more companies than the Dow average and uses market value, not share prices, to determine company weightings, said Roger Volz, New York-based senior vice president at Hampton Securities Inc. and a technical analyst since 1982.
The index would probably plunge to 681 should it fall below the 11-year-low of 752.44 reached in November, according to Volz. His chart-based techniques include Fibonacci analysis, named for a 13th-century mathematician.
“I don’t think we get out of the woods for 14 months,” he said. “The destruction is severe.”
To contact the reporters on this story: Cristina Alesci in New York at [email protected]; Eric Martin in New York at [email protected].
Last Updated: February 20, 2009 16:56 EST
Email | Print | A A A
By Eric Martin and Cristina Alesci
Feb. 20 (Bloomberg) -- The Dow Jones Industrial Average’s drop to a six-year low presages more losses for the 30-stock gauge, according to analysts who base forecasts on price charts.
The measure’s slump below its Nov. 20 low to the worst level since October 2002 means it will keep falling, according to a 19th-century analysis known as Dow Theory. Its adherents say that losses in the average worsen when the Dow reaches a low at the same time as the Dow Jones Transportation Average, which happened today and yesterday.
Concern the deepening global recession will force the U.S. government to take over banks sent the Dow to its worst weekly decline since October. The rout left the Standard & Poor’s 500 Index, the benchmark for U.S. stocks, within 2.3 percent of the worst level since 1997.
“The direction of the market is clearly down,” said Richard Moroney, who manages $150 million at Hammond, Indiana- based Horizon Investment Services and edits the Dow Theory Forecasts newsletter. “We’re holding a lot more cash than we normally do.”
Citigroup Inc. and Bank of America Corp. declined the most in the Dow this week, losing more than 31 percent, on concern shareholders will be wiped out through nationalization. General Motors Corp. had the third-biggest slump, losing 29 percent on solvency concerns. General Electric Co. dropped 18 percent to $9.38, becoming the fifth stock in the average to trade sink $10 since last year. The Dow decreased to 7,365.67 this week.
‘In Force’
Dow Theory, created by Wall Street Journal co-founder Charles Dow in 1884, argues that transportation companies are harbingers of economic activity. The transportation gauge slipped below its November nadir in January, and now trades at the lowest since September 2003. YRC Worldwide Inc. and JetBlue Airways Corp. fell the most this week, losing more than 27 percent.
Dow Theory is showing that “the bear market is in force,” said Philip Roth, the New York-based chief technical analyst at Miller Tabak & Co. “It doesn’t tell you whether it’s going to last another year or another day. It isn’t a forecaster of magnitude, just direction.”
In November 2007, one month after the Dow industrials and S&P 500 surged to record highs, Dow Theory suggested the rally was over. The S&P 500 went on to tumble 38 percent in 2008, the most since 1937.
$800 Billion in Spending
The Dow Theory forecast goes against all 10 Wall Street strategists tracked by Bloomberg, who on average project the S&P 500 will rise to 1,059 by the end of the year, a 38 percent gain from today’s close of 770.05. Almost $800 billion in federal spending and the cheapest valuations in two decades will spur the rally, the strategists say.
The S&P 500 is a better indicator of the market’s direction because it has almost 17 times more companies than the Dow average and uses market value, not share prices, to determine company weightings, said Roger Volz, New York-based senior vice president at Hampton Securities Inc. and a technical analyst since 1982.
The index would probably plunge to 681 should it fall below the 11-year-low of 752.44 reached in November, according to Volz. His chart-based techniques include Fibonacci analysis, named for a 13th-century mathematician.
“I don’t think we get out of the woods for 14 months,” he said. “The destruction is severe.”
To contact the reporters on this story: Cristina Alesci in New York at [email protected]; Eric Martin in New York at [email protected].
Last Updated: February 20, 2009 16:56 EST
