Wednesday, February 28, 2007

My Dow call from 4 months ago

Back in late October, I called for a 4-500 point Dow correction in early 2007.

I got the index level wrong; the market continued to rally for these last few months. Here is some commentary retrieval:

OCT 27
I called the DOW.TOUCH.12000 back in late 2005 for 2006, and now I am calling for DOW.TOUCH.11600 in the next few months. While I don't think that equities are overvalued, I think a moderate selloff is coming, due to the following drivers:

+ end of reporting and fiscal year for many mutual funds and banks is holding off meaningful selling

+ VIX (volatility index) sputtering down to a 10 year low, and the suggested rebound in vol will bring some fear back to balance the greed

+ while most earnings reports are still to the upside, the share of disappointments is growing vs. previous earnings season. Also, revenues are not increasing as quickly anymore.
I am sticking with my DOW.TOUCH.11600.JAN2007 call from last month.

NOV 16
The DJIA will trade over 12300 today. A few weeks ago, I called a retreat down to 11600 through early 2007. I am now revising that target to 11800.

I am still looking more at economic growth and corporate earnings. Those are no longer growing faster than stock prices. One indicator of that: the price/earnings ratio of the S&P 500 has increased by 0.25% over the last couple of months.
Bearish sentiment may build, now that the collective psychological pendulum has moved a bit from extreme greed towards fear. But I am still generally bullish (until the baby boomers start collecting social security--I think Congress is like the crew of the Titanic, and will not be able to avoid the iceberg until things get really dire). Corporate earnings and household incomes should continue to rise in the coming years.

Dow Jones Industrial Average Index (^DJI)

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