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Why The Dow Jones Industrial Average Will Plummet To 5,500 By 2017

January 13th, 2016

bearbull2Harry Dent:   Large-cap stocks opened this morning in the green, seeming to offer a little reprieve from an ultra-violent start to 2016. Small- and mid-caps weren’t so lucky. They’re continuing to rip through fresh new lows.

This has been the toughest bull market and bubble to call, as many leading indicators that we have used in the past simply don’t work since central banks hijacked the markets after 2008. But with these major divergences continuing to build, and after many years of the Fed’s zero-percent interest rates, it seems we’re finally coming close to the end.

You just can’t have a recovery that’s driven entirely by government stimulus. It only works when consumers start spending again and businesses expand to meet the demand.

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Otherwise, you prevent the economy from rebalancing naturally, and only encourage greater speculation and bubbles… and that’s exactly what these bogus policies have done.

I’ve been warning more and more strongly from late 2014 forward that this bubble finally looked like it was peaking after going much longer than anyone could have imagined. But into May of 2015 it continued to edge up to slight new highs. Since then we have continued to make lower highs on each rally – what I call a “rounded top pattern.”

But there’s a classic indicator that tells when a major bull market or bubble is finally peaking. I was suspicious that this indicator would not work this time in such an artificial market and economy. But it’s working like a charm.

That indicator occurs when small-cap stocks greatly underperform large-cap stocks. This is a sign that the dumb money is piling in and the smarter money is exiting. It’s like the generals advancing without the troops.

Analysts use the advance/decline line to measure this phenomenon. But since it can get confusing, here’s a simpler take on it: the value line geometric index (the blue line in the chart below).

This is an equal-weighted and broad index of stocks. Instead of Amazon and Google counting for god-knows-how-much of the S&P 500 and skewing our sense of the broader market, this index weights them all equally.

That way you get a sense for how the broader market is doing. So look at how it’s doing compared to the S&P 500:

Value Line Index Shows Broader Stock Market Already in Bear Market

It shows that the “typical” stock is already in a bear market – down 21% as of yesterday.

The Dow and S&P 500 and the Nasdaq are all weighted by market value and that makes the largest stocks dominant in such indices. At the end of a bull market, the least sophisticated investors pile in and they buy the big-name stocks that they know – Apple, Coca-Cola, Facebook, Nike, Google, Amazon.

Those stocks get super overvalued. D

o you realize that Amazon is up 120% in the last year and that its price/earnings ratio is currently at 870 times a 12-month trailing earnings of $0.70?

That’s insane!

This is a time to sell on rallies, not buy on dips.

Stocks appear to be coming back after a rough start to the year, but I ultimately project the Dow Jones Industrial Average (INDEXDJX:.DJI) will be down to 5,500 to 6,000 by early- to mid-2017, and possibly sooner.

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  1. Harold
    February 5th, 2016 at 19:13 | #1

    @Arupkumar Das
    Shxt does happen u know. :)

  2. Elie Khawand
    February 4th, 2016 at 11:27 | #2

    Wall Street has the largest Casino in the World, the Stock market, where greed and illusions blind people from seeing real facts.
    Most people buy stocks just based on speculations in companies that have a giant price to earnings ratios or no earnings at all without having any control on those companies operations or outcomes. They are alone to blame.
    The stock market has deviated from its original and important purpose of financing viable enterprises with the money of an informed public to a place where financial realities are replaced by unrealistic dreams of making a quick buck.

  3. whome
    January 28th, 2016 at 07:23 | #3

    Doom and gloom yet an article on the same page said Dow Jones Industrial Average Will Reach 25,000 Because QE4 Is Coming. Obviously these so called experts are totally out of sync with one another and probably reality.

  4. james
    January 19th, 2016 at 14:22 | #4

    And if it does fall below 5000, then GREAT!!! Only means that if you have a DRIP program with good dividend stocks in place you will accumulate more shares faster. The stock market will always rebound eventually. You just need to be a disciplined investor and not FREAK OUT when a massive dip occurs and sell everything for a huge loss.

  5. Mitchell Davis
    January 19th, 2016 at 13:25 | #5

    @Arupkumar Das
    It is unlikely to go below 14,000. But it is all about statistics/odds. So maybe there is a 1/10 change it will go below 14,000-but you don’t know for sure what the future holds. Just like the financial collapse-it is one of those events that was unforeseen by most.

  6. Jeff Manny
    January 15th, 2016 at 07:41 | #6

    Jeff Manny :
    I agree that Dow will plummet to 5500 unless the Western World find another region to tap to.
    The Western world appropriately or inappropriately have tapped to riches of Middle East since 1980, removing all of their wealth by making them to fight each other.
    The riches of Middle East is over. Where is the next place Western World is going to tap to? Australia, China, India, Japan or Europe.
    If you look at the creation of human gathering out of being a cave man, always they have tapped to riches of tribes, countries and now regions to steal their wealth often by wars. This is the human civilization.In my opinion the easiest target is Australia or India.

  7. Arupkumar Das
    January 14th, 2016 at 22:44 | #7

    It is all bullshit. Dow will not go down below 14000.

  8. ADR
    January 14th, 2016 at 17:06 | #8

    @Charlie Reckless
    what are you talking about. I would bet you cant do a simple DCF calculation but you are an expert on where the DOW should be

    PS HARRY DENT is a class A moron! But he is on the internet so it must be true!

  9. Jeff Manny
    January 14th, 2016 at 16:29 | #9

    I agree that Dow will plummet to 5500 unless the Western World find another region to tap to.

    The Western world appropriately or in appropriately have tapped to riches of Middle East since 1980, removing all of their wealth by making them to fight each other.

    The riches of Middle East is over. Where is the next place Western World is going to tap to? Australia, China, India, Japan or Europe.

    If you look at the creation of human gathering out of being a cave man, always they have tapped to riches of tribes, country and now region to steal their wealth often by war. This is the human civilization.In my opinion the easiest target is Australia or India.

  10. Charlie Reckless
    January 14th, 2016 at 04:32 | #10

    I read the article and do agree nobody is a guru. But he is right. The Dow was never meant to exceed 5k and it didnt for almost 100 years. Its a been a bubble that busted holes in 2008 and tgey just patched it up. Its going down.

  11. james
    January 13th, 2016 at 17:39 | #11

    Typical ALARMIST here is action!!! Didn’t you hear the news??? Trump is coming to save us all!!!! lol

    I wouldn’t be too alarmed of the recent 13 day dip quite yet!!!

  12. John Doe
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