Putting the pieces together...

Longer Term

The charts I will show of the Dow will be reminiscent to those who have seen my work over the past 15-20 years in various media and sites. Range bisections from previous extreme levels are powerful price support and resistance markers, as are divisions of that bisection. For very long term charts with huge price moves, logarithmic (percent) charts work best.

The first chart shows the Dow from the 1932 low bisecting the great sentiment range from the A/D high of 1965 to the A/D low of 1982. The parallel lines 50% above and below the median and the extreme parallels have been active at most of the highs and lows of this quarterly (three month) chart. From 1987 to 1995 the median line resisted the advance of the Dow. Then it broke through in a powerful bull market and ran up almost to the extreme in January 2000. Thus 2000 was the beginning of weakness in a very long term bull move from 1932. By 2002 the Dow fell back to the median line and then rallied again up towards the 3/4 line but fell short in 2007. More weakness. After falling below the 1/4 line in 2008/09, the Dow rallied up until this year but failed to reach the median line. Thus we have three instances of failure. Also notable is that this year's high was just short of the rally high into May of 2001 from the highs of January and September 2000. A shorter term arithmetic fork shows that failure below the median from the 2002 low through the 2007-2008 range.

This is basic chart analysis requiring no rocket science oscillators or other indicators. The Dow looks sick since 2000 and could fall to a level of 6000 very easily. Even at that level it could still be bullish.

1913 Musings

1913 is an important date to keep in mind. That was the year the income tax came into being, and the excess profits tax, and the department of labor, and the Federal Reserve: "Robbing Hood" all the way. Oh, and Ford introduced the first moving assembly line in 1913. Tit for tat.
 
The average price of the Dow Industrials in 1913 was 80. Let's be charitable and say the dollar has lost only 97% of its purchasing power since 1913 up to 2010 and not 98-99% as some say. 80/0.03 = 2666.67. That makes only an assumption that the current DJIA stocks have a similar net worth and earnings capacity. The first time the Dow traded above 2667 was in August 1987 which means nothing except that it was overvalued then. The Dow might still be overvalued at 2677 even in 2010. 2667 would only be a 73% decline from here, or a lot like 1931-32.

Some say that times are completely different and technology has changed things. But let's not confuse technology with progress. Technology is much like the fashion industry and technological products have a similarly limited duration of appeal after which a technology company may or may not be able to repeat.

Also keep in mind that the Dow went back to the price of 40 more than several times over a 60 year period until the currency really started getting debased in 1934. That was true before, during, and after the great inflation from 1893-6 to 1919. Another way to look at the Dow in terms of the debased dollar, for example, is to take the 2010 Dow high of 11258 and multiply it by 0.03 (residual value of US dollar). That gives you a 2010 real Dow of 337.56.... The compound annualized real rate of return for the Dow (price only) since 1913 (97 years from the average Dow price of 80 the to 337.56 in 2010) is 1.49% per year! That's a pitiful fact "they" don't want us to think about.

Here's what gold did from 1913 to 2010: Your Yield Over 97 Years With an Initial Amount of $ 20.67 and a Final Amount of $ 1237.50: 4.23 %..... Even if you adjust gold for the same 97% currency debasement as in the stocks example, $20.67 gold in 1913 became $371.25 in 2010 or a 2.98% compound annualized growth. That's the "famous" 3% growth rate of inflation we used to have for centuries, and it's double the rate of growth for Dow index stocks before capital gains tax and after you paid tax on the Dow dividends and spent the rest!! These are just back of the envelope musings and jottings for perspective.**

Anyway I largely sold in May, and now I'm going away in June. I will probably not be able to post for several weeks, but I'll try to answer questions that may arise.

**Correction: A careful reader has pointed out a major error in my "back of the envelope" calculation for gold from 1913-2010. If we take yesterday's all-time high for cash gold of $1251.68/ tr. oz. and multiply that by the assumed (by me) residual value of a 1913 dollar, the 1913 value of gold yesterday was $37.55, so my "quick calc" was off by one decimal point! Using  Hugh Chou's yield calculator, the real annualized yield for gold from 1913 to date was 0.62% per year compared to the Dow 30 price only yield of 1.49%. Clearly gold preserves value plus a little bit more over long periods of time, and so do stocks. That's why modern investors don't rely on government or corporate bonds only as they could in the 19th century. The annualized yield of the US Dollar going from 100 cents in 1913 to 3 cents today was -3.55%. That's what we're working to protect against!

In all of this I have assumed no commissions, taxes, or maintenance fees on principal of either stocks or gold, no earnings for gold, and that dividends were taxed and the remaining after tax dividends were spent. In the US only insurance company reserves, pension funds, and some charitable foundation assets could be held for so long without taxation of any kind.