The Dow Jones Industrial Average is a market indicator that is priced in current dollars – just like Nominal GDP. Both "markets" go up and down, expand and contract, inflate and deflate, and both are dependent on the same currency. These dynamics can easily change the Action Zone’s range. That’s why it needs to be updated.
Here’s how today’s "market" fits into the Action Zone which was recalculated using recently released market data.
Since the last recessionary bottom, which I consider to be the end of 2002, the Dow’s average value was 12,645 points – just 9 points off it where it stands on the day I prepare this blog. Currently at 1,300 point above the action zone midpoint, "the market" is toppy here – not to mention that it looks scared.
Anything above the 13,420 mark can be called irrational exuberance all over again – and Wall Street knows it. They, too, are scared of the volatility that would exist up there and the possibilities of severe split-second sell-offs. That’s why I wouldn’t expect to see the Dow surge through the action zone’s top. There’s simple no reason for such a valuation. Too much bad news is all too frequent these days.
But this is not say that the Dow won’t move outside the action zone to an unjustifiable point, as it did when it hit its all-time high in October 2007 – one year before the market crashed. Wall Street overreacts to everything, good news and bad, because it usually pushes valuations to the brink before the correction occurs on news that came in "worse than expected." So when there is a reason to sell-off with dramatic fashion, the stock market will do so and blow right through the bottom of the action zone.
Why do I say? Because the proverbial other shoe to drop is one of three things and all of them are really bad for markets and investment. Once again, they are:
- Realization of Recession
- Inflation that forces Interest Rates higher
- A EuroZone Disaster
All three of these conditions have the potential to bring about a severe stock market correction, which to long term investors, represents the next great opportunity to profit.
Until then have a plan, know where you are, and stay tuned…