Don’t Expect the Dow to Retest Its Lows

10/02/2007 12:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of the Chartist, says the market indexes hit their lows on August 16th and he expects them to post impressive gains in the months ahead.

On Tuesday, September 18th, the Federal Reserve dropped interest rates by one-half percent. Historically, when the Fed starts to lower interest rates, the stock market has moved higher.

As with all market indicators, there is never a perfect record. Historically, though, when the Fed started easing, the Dow Jones Industrial Average had an average gain of 19% one year later.

It continues to be our contention that an effective bottom was reached at the August 16th intraday lows, which were 12,517 on the Dow, 2,386 on the NASDAQ Composite index and 1370 on the benchmark Standard & Poor's 500.

There's no question that on August 16th panic selling took hold in earnest. At the low point of the day, the Dow had dropped 344 points. Then, out of nowhere, a sharp rally ensued and by the close of trading the Dow had retraced almost all of the ground lost, finishing less than 16 points under water for the day. This type of price action is representative of a classic key reversal day.

Historically, odds are in favor of the market moving higher over the next 15 months as pre-Presidential election years and election years have produced the best average annual gains for the Dow Jones Industrial Average. The average gain in a pre- election year has been 10.6%. The market in an election year has been up 29 times and down 14 times with an average gain in the Dow of 6.7%. Since 1833 the pre- election year and the election year combined have produced a total net market gain of 745.9%.

The economic picture continues to be mixed. While the housing market remains in a slump and consumer spending has slowed considerably over the past few months, business investments in capital assets have continued to trend higher. For example, non-residential construction spending rose 15.4% during August, as compared to the same period a year ago, and non-defense capital goods orders-a leading economic indicator-rose 1.7% versus the previous month.

Although the economy experienced job losses during August for the first time in the past four years, the employment situation is still quite strong, with the unemployment rate holding at 4.6% in August.

While economic growth has slowed in the US, economies throughout many other parts of the world have continued to expand at healthy rates, [especially] in the world's emerging economies, with China leading the way-growing 11.9% [annually] in the second quarter.

Although the declining value of the US dollar has some negative inflationary implications, this trend will likely result in a continued increase in US exports over the coming months. As a result, there's a good chance economic growth in the US could improve significantly going forward, in spite of tightening credit standards. With our models in a positive mode, we remain in [the] bullish camp.

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