When History can Forecast the Future

Kennouth Investments

When History can Forecast the Future

            Looking at a historical chart of the Dow Jones Industrial Average of the past century, any novice investor could observe that the economy moves in cycles.  While this is simple economics, why is there always someone out there saying, “Yes, now, this is the best time to buy stocks,” however, the smarter trader knows when to buy on the dips.  But how do those dips and crashes turn into rallies and bull markets?    

            Shown above are the mountains of money the DJIA has had to climb to get to its present state.  (I need to say the chart is dated to March 10, 2013.)  There are a few major aspects to be taken from this.  The first is the number of recessions taking place greatly diminishes as time continues.  And they don’t occur as often in the uptrends compared with correction periods or downtrends.  The second is times of war tend to be more volatile.  It isn’t until several years after major wars that we experience bull markets.  Third is a strange thought, but the recessions, especially the large ones, occur near major administration changes.  The bounces back from these dips also typically precede resistance-breaking rallies.  Lastly, it is apparent the market has grown exponentially and the next leg up should occur soon.

            Unfortunate it is that this graph ends in 2009, but knowing where it the market is now, it makes it easier to read these charts and provides the theoretical evidence upon which I trade.  Since the crash of ’29, the periods of decline have grown shorter in length and the rallies longer, a good sign for the might of the American economy.  Knowing of where the market has gone since the drafting of this chart, and according to it, the stock market has been in a bull market for just under a year now, when the Dow crossed 13,930 back in February.  Seeing as the current levels of the Dow are 15% above the previous mark, and all of the previous growth periods witnessed plus 148.92%, there’s bound to be a new frontier of economic expansion to discover.  Dow 20,000 might be closer than we all think.