Why the Dow Will Hit 38,820
05/06/2011 8:00 am EST
In this interview with John Nyaradi, Jeff explains his detailed research of market and historical cycles that point to the possibility of another super boom and details how you can prepare for what could be another historic bull market.
John Nyaradi: Jeff is president of the Hirsch Organization and editor-in-chief of Stock Traders Almanac. He appears frequently on CNBC, CNN, Bloomberg, Fox News, and many other national and international media outlets. Now, Jeff is author of what I think is sure to be a new bestseller, Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It.
Jeff, you made some big waves back in October with your prediction of the Dow Jones Industrial Average going to 38,820. Interestingly, your father, Yale Hirsch, made a similar prediction in 1976 when he forecast correctly that another 15-year super boom was going to take place, a move of 500% or more.
So, Jeff, can just give us an overview of the super boom; the concept, your targets, when does it start, how long will it last, and why Dow 38,820? That’s a lot to dive into, but if you could…
Jeffrey Hirsch: Yes, that’s a loaded question, but basically, the super booms that we’ve had in the past—the three major booms in the 20th century—all followed flat sideways markets and war where the United States was involved overseas in heavy combat operations.
So after World War I and after World War II and after Vietnam, we had a period of prolonged peace where inflation caused by all the spending on the wars caused the market to take off and inflate itself 500%.
The reason that we get the 38,820 is you take the intraday low—it was on March 6, 2009, at 6470— and you multiply it by six, which is a 500% move, and that gets you up to 38,820.
Watch video: Dow 38,820 by 2025
John Nyaradi: You mentioned the cause of this super boom, inflation and peace between major wars, and we’re seeing some of that happening now.
Jeffrey Hirsch: Yeah, that was the sort of epiphany. Actually, the initial forecast was culminated in May, May 13, 2010. We put out one of our bi-weekly alerts to subscribers, to our newsletter service.
What we saw at the time was that you had this massive bear market and the sideways pattern from 2000 from the tech bubble through 2010 in which we hadn’t really gained a whole lot of ground. We were playing out one of those sideways-market launching pads like we had in the three previous bust cycles, and here we were winding down a major military operation in Iraq and Afghanistan and we’re starting to see inflation beginning to grow.
About a year ago, it wasn’t really apparent that the inflation was there, but we knew it would be. We did a comparison of government spending and inflation, and you see a big spike in government spending following 9/11, and you know, over the next several years, inflation was just starting to perk up.
John Nyaradi: Sure, that makes sense. I know timing is a tricky thing, but what’s your target date for this super boom?
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Jeffrey Hirsch: Actually, I’ve put out a little projection pattern of the next 15 years. We came up with it after the book came out, and basically, you know, the short term, the intermediate term over the next several years looks like more of the same sideways pattern with the economy going through fits and starts, the market following that, or leading that, as it usually does, the range staying in that 14,000-7000 area for the Dow over the next five or six years.
And I see the boom beginning sometime in 2017 or 2018 and rallying up there to 2025, 500% from the low in 2009. So kind of like the move in that the period between 1974 and 1982 where we had the big bottom in 1974, and we went sideways.
We had a couple of oil embargoes and several other geopolitical issues, and inflation got quite out of control.
And then in 1982, once the new enabling technology took hold, the PC and the Internet followed by the cell phone creating that information age, you know, you have the market just actually boom about 1500% from the ’82 lows.
I don’t see us having another information age, but I do see something more akin to the boom that followed the automobile in the roaring ’20s and the television, the suburban, you know, the appliance boom of the ’50s and ’60s, so probably something along those lines.
John Nyaradi: I’m sure you’re going to tell your readers at Stock Traders Almanac when you see this boom arriving, but what kinds of things should the average retail investor be looking for?
Jeffrey Hirsch: Well, you know, as with most of these things, it’s only going to become completely apparent with a bit of hindsight.
There has to be a little bit of looking in the rearview mirror to see that it has happened, but to prepare for that so that you don’t have to miss a bunch of it over the next several years, my mantra as we’ve discussed in the final chapter of the book is to trade some of the seasonal patterns we have, stay out of the way of the generally negative periods that the market has exhibited, and anytime the Dow is below 10,000 or a bear market is officially declared in the media, that’s the time to buy stocks.
You want to be thinking contrary to the market, buying when things are cheap. You want to buy low, sell high.
So over the next several years, wait for the low periods, sort of wait for there to be a low, for there to be a good amount of selling, and for everyone to be exhibiting some fear, and that’s when you want to get in.
John Nyaradi: And chapter ten of the book, of course, is maybe the most important part of this. You have laid out a really good historical foundation for this super boom. You talked about enabling technologies. When it comes, what are the good places for investors to look, what might be the good sectors, the real leaders?
Jeffrey Hirsch: Right. You know, that’s part of the equation for the boom, the enabling technology. I’m seeing the possibility that it could very well be something that none of us has seen or heard of.
It could be being developed in some lab or garage as we speak, but I think there could be, you know, it could come from the alternative energy area or maybe biotechnology, something that can really touch a broad swath of the planet, and you know, if we could harness the energy of the sun, and Edison recommended that we should, I think that could easily fuel that next boom. Literally fuel it.
John Nyaradi: I’ve been a long-time reader of the Stock Traders Almanac, I quote you often in my own writing, and one of the things I really like best is your historical research about the best six months and the worst six months. Can you talk a little about the worst six months of the year since we’re just entering that period now?
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Jeffrey Hirsch: Well, sure. From our historical seasonal analysis of market behavior, we noted that most of the markets’ gains were made from the November-to-April period, and that, from May to October, the market pretty much lost ground or went sideways.
So back in 1986, we introduced this six-month switching strategy. And we’ve seen the market gain about half a million dollars since 1950 when you put in $10,000 in 1950, as compared to the worst six months where you lose about $400 to $500 over the 61-year period. In the best six months, you average about a 7.4% gain, and so about a $527,000 return.
You could improve on those results by using a little technical timing tool. We used the MACD, which I guess most people are familiar with these days, which is a moving average. It’s called Moving Average Convergence Divergence.
It takes a few different exponential moving averages, and it shows a nice flip of momentum, and using that timing, this should triple the result as the same $10,000 you put in 1950 turns into about $1.5 million versus a loss of about $6,500.
John Nyaradi: Wow.
Jeffrey Hirsch: This extends or shortens that six-month period, you know, by a month or so, depending upon what’s happening, and we just issued our seasonal MACD sell signal for 2011 the other day, and it seems to be working pretty well so far.
See video: The Best Six Months to Trade Stocks
John Nyaradi: I agree. I followed that myself and watched that, and what’s so good about your work is that you really go back and get that historical data and base this system on really reliable information.
Jeffrey Hirsch: I guess the reassuring thing or a little source of pride for us was that a few years back, we picked David Aronson’s book, Evidence-Based Technical Analysis, as our best book of the year for the Almanac, and in it he pretty much refutes about 600 or so different technical systems, some black boxes that were proven to be as much a form of chance than actual strategy, whereas the best six months strategy was proven to be sound, unlike any of the other ones that they evaluated.
John Nyaradi: That’s great. I always like to end these conversations by asking if there is there anything else you’d like to add that’s really on your mind right now, that you’d like to share?
Jeffrey Hirsch: I guess the one thing is the disaster in Japan that could have some backlash down the road on the global economy and take a pull on it kind of like the San Francisco quake of 1906 was one of the factors that created the banker’s panic of 1907. So I’m concerned about the lingering effects of the quake and tsunami in Japan.
John Nyaradi: Sure, I agree with that outlook. Well, folks, we’ve been talking with Jeffrey Hirsch, author of Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It. The book has received great reviews from people like Forbes columnist Ken Fisher; Sam Stovall, chief investment strategist of Standard and Poor’s; and many others.Interview by John Nyaradi of Wall Street Sector Selector