Market Update

January 31, 2006

On DOW’s long-term future.

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Copyright © 2000 by Theodore Modis. All rights reserved including the right of reproduction in whole or in part in any form.

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Monthly Update

Exhibit 1. This Exhibit from An S-Shaped Trail to Wall Street was updated here on 23-Dec-2005.

No attempt is made to update further the long-term forecast (red line) because it is bound to remain flat by definition. This forecast is obtained by dividing two S-curves (one for the share volume and another one for the dollar value) both of which have reached their ceiling. Therefore no further variation is expected from their ratio. This approach was suitable for describing DOW’s main growth phase during the 1990s.

Insights into the long-term evolution of the DOW can be obtained from another approach that I presented in An S-Shaped Trail to Wall Street namely the fact that all of DOW’s growth comes from the divisor. Exhibit 2 shows that the average DOW price remains rather constant—within fluctuations—over time. In contrast Exhibit 3 shows that the inverse of the divisor, call it the multiplier, grew tenfold in the last twenty years. In other words DOW’s main trend comes from the multiplier whereas its fluctuations come from the average price.

An overall S-curve fit on the multiplier (purple line in Exhibit 3) says there is more growth in store. We presently are at 73% of the ceiling of this S-curve. The exhibit also shows a cyclical variation of the multiplier data around the S-curve trend. Exhibit 4 quantifies the period of this cyclical variation as 12 years. The dotted line in Exhibit 3 shows how the multiplier is expected to evolve.

Now then, assuming the average price will not change (other than fluctuations) we can use the forecast for the multiplier to produce a forecast for the DJIA, shown in Exhibit 5. It says that by January 2010 we could expect the DJIA to be around 13000.

Exhibit 2. The average DJIA price has been confined between $40 and $80 for the better part of the market’s existence.

Exhibit 3. A good S-curve fit over this period signals a cyclical variation (extracted in Exhibit 4 below), which is then used to make the dotted-line forecast.

Exhibit 4. The cyclical variation of the multiplier obtained as the ratio of data over S-curve in Exhibit 3. The period of the sine wave (turquoise line) is 12 years.

Exhibit 5. The DJIA and a long-term forecast (dotted line).