What’s The Problem With The Dow Jones? Maybe It’s Overvalued

The Dow Jones continues trading in a tight range in its BEV chart below.  For the past three months it refuses to rise up to a new all-time high, and is incapable of deflating below its BEV -10% line.  The longer the Dow Jones remains in this trading range, the more significant it will be when it does breaks out, be it upwards to new all-time highs, or breaking below its BEV -10% line.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #1   DJ BEV 2013_20.gif

Should I care to guess which way the Dow will break out, I’d have to factor in what the FOMC is doing in the market place; “injecting liquidity” into it as they deem fit.  

Last week they deemed fit to “inject” $29.97bil into it, as seen below.  Since July 6th, they’ve “injected” $356bil (1/3 of a trillion dollars in just sixteen weeks) into the financial system.  That’s a lot of “liquidity” to be “injecting” into the banking system, and yet the Dow Jones remains range bound between its BEV -10% and BEV Zero lines above?

Nope, I don’t think I care to hazard a guess of what’s next to come for the Dow Jones.  That’s something best left to the “market experts.”

 

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #2   Wk Cng Fed Hold 10Wk MA.gif

Moving on to the Bear’s Eye View values for the major market indexes I follow below, we see five new all-time highs last week, at least one a day, until Friday when the indexes all closed a least 1% from their last all-time high.  

This lackluster performance isn’t going to change until the FOMC decides to do something about it.  But do they really want the market’s bulls charging up the hill once again, or maybe they currently want exactly what we are seeing below; the market maintaining its current status quo of running in place.

It’s too early to call for one, but not for considering the possibility of a double top being formed in the Dow Jones daily bar chart below.  We’ll know more by next week, and even more the week following that.  

Somehow today these promises of future market certainty aren’t all we would want of them.  But that’s what makes following the markets such a challenge.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #3   DJIA OHLC.gif

So far, the Dow Jones (DIA) has yet to exceed the high of its current advance on August 3rd.  Who knows what is to happen in the months to come?  Not me!  But should the Dow Jones break below its BEV -15% line below, and one day it will, I’d be very concerned, especially should bond yields begin to rise.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #4   Great Dep & Ours DJ BEV.gif

I like publishing the following three charts a couple of times a year to keep a sense of history with my work.  The first is the indexed values for Currency in Circulation (Green Plot: CinC / Paper Money in Circulation), the Dow Jones (Red Plot) and the Barron’s Gold Mining Index (Blue Plot: BGMI).

The effects of monetary inflation on market data are obvious.  These plots are indexed to 05 January 1920 = 1.00, and in the past century they’ve inflated by a factor of:

  • CinC: 454;
  • BGMI: 90;
  • Dow Jones: 262.

In the main body of the chart, the three series don’t appear to have done anything until 1965.  So, I’ve inserted a chart plotting these series from 1920 to 1970 to provide information on these five decades.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #A   BGMI DJIA & CinC.gif

Note above how the Dow Jones exceeded the rate of inflation (Red Plot rising above the Green Plot) only once since 1920, during its Roaring 1920s Bull Market.  For two weeks in May 1965 the Dow Jones matched the rate of CinC inflation, not exceeding it, but hasn’t since.  

Never again has the Dow Jones risen up to touch the green CinC plot in the chart above, though it came close twenty years ago in 2000.  However, since 2000 the rate-of-inflation (as measured by CinC) has far exceeded any increase in the Dow Jones.  I expect that’s also true for the majority of the shares trading in the American stock exchanges, though I’m sure there are exceptions.

What about dividends boosting stock market returns?  That brings up my second chart I like publishing a few times a year; the dividend yield for the Dow Jones going back to 1925.

Since 1992 the Dow Jones, except during the 2007-09 credit crisis bear market, and again last Spring, has yielded less than 3% (see chart below).  After income taxes it’s been less than that.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 674\Chart #B   Dow Div Yield 1925_2025.gif

So, returns in the broad market, including dividends, haven’t compensated investors for inflation risks.  But keep in mind money invested in the stock market has outperformed money deposited in a bank since Doctor Bernanke lowered his Fed Funds Rate to zero in 2008.  Not only did one’s investment grow in the stock market, so did dividend payouts.  And blue-chip stock dividend yields were higher than the interest rates offered for savings accounts at banks.  This wasn’t hard as banks today offer only a few basis points (0.01% = 1 Basis Point) on deposited funds.

If Grandma wants to receive 5% on her life’s savings, something that was once easily done with a savings account at a bank, she best “invest” in junk bonds as many “market experts” would advise her.  For myself, an established dividend paying miner of precious metals seems the way to go for those in search of income in today’s uncertain world.

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