Is DOW 22,000 Coming?

Brian Hicks

Posted May 6, 2013

Last Friday the Dow made an all-time intraday high, breaking above the 15,000 mark at 15,009. It would later pull back to end the day at an all-time closing level of 14,973.

Dear reader, we have a genuine breakout on our hands. And the Dow has the potential to hit 22,000.

Now, that’s not speculation on my part; it’s based on a simple reading of the charts. And once I show you this particular chart, I think you’ll agree with me.

But before I state my case, let me warn you that you will hear the naysayers (perhaps even some in this very publication) argue this is a “liquidity”-driven market — no “QE Whatever,” no bull market.

There’s probably some truth to this. But remember the old trading adage, “Don’t fight the Fed.”

You’ll also hear the naysayers say, “Trading on margin is at a near record level.” And it is. You’ll hear them argue that “interest rates are too low… Once the rates go back up (as they always will), the economy and the stock market will tank.”

The truth is the current market is irrational. But it always is. Many believe the market to be an insoluble riddle of the Sphinx, from the legend of Oedipus: Behind each negative market indicator lies another negative indicator that must be dealt with first, and behind that lies another problem, and another, ad infinitum.

But I think it’s just plain psychology — or the mind of the market. There’s no reasoning with it, much like there’s no reasoning with a crazy woman. You see her for what she is.

You don’t try to reason with her, and you don’t try to change her. You will fail if you try.

When I was attending the Market Technicians Association studying to become a CMT, there were so many technical indicators out there to try to explain the market, that if you assigned one to each and every American citizen, you’d still have some left over. And some are just as complex as using the golden ratio (God’s math) to predict rallies and corrections.

I decided to keep it really simple: support and resistance lines, head-and-shoulders, higher highs, lower lows, and Dow Theory, etc.

So here we go…

Take a look at the chart of the Dow Industrials:chart1_brian_0506
I’ve drawn long-term support and resistance lines going back to 1999.

Prior to this year, the Dow’s last record high was set in late 2007. From that high, the Dow hit a low on March 6, 2009, of 6,469.

The difference between the high set in 2007 and the low set in 2009 is about 7,700 points.

Historically, chart analysis says if the market rallies from that low and breaks above the old high level (know as resistance), add the difference to the old high. That will give you a potential target if the breakout is for real.

So here’s the math: 14,198 (old 2007 high) + 7,729 (the difference between high and low) = 21,927.

Now you’re probably thinking two things: 1) Dow 22,000 seems outrageous; and 2) If true, when could we see Dow 22,000?

Well, first: All numbers (or records) seem unbeatable before we reach them. Back in the late 1990s, everybody thought Dow 10,000 was unreachable. It wasn’t.

And second: It’ll only take the Dow two straight years of +20% performance per year to reach Dow 22,000 (Dow 21,600, to be exact — but I’m rounding up).

Remember, it’s all psychology.

But if you need some fundamental reassurance, here’s a historical P/E chart of the S&P 500:

chart2_brian0506

The P/E ratio of the S&P 500 is currently at 18.6. Not cheap, but also not expensive.

There’s room for P/E multiple expansion in the currently rally. If the P/E multiple increased 20% per year (I’m not even considering earnings increases in this calculation) — for the next two years — the P/E ratio of the S&P 500 would reach 26.

That would likely take the Dow to 22,000… and that’s when I would be looking for a robust correction.

It’s time to get net long.

Forever wealth,

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Brian Hicks

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Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.

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