The DJII has completed the “W” shaped double bottom formation that was anticipated in the previous blog post. The market is nudging the resistance line at the 17.600 level.
No doubt the technicians will have to wait for a breakout above this level and then some other confirmation or excuse for not pulling the trigger. However, the dividend discount value of the DJII remains at more than twice its price so the fundamental upward pressure continues with no let up in sight.
The following chart shows the dividend discount value of the DJII and its price from 1981 until today. Prior to Lehman the correlation coefficient was 0.93. For the entire period it is 0.83. Notice how Black Monday fades into insignificance when viewed on an arithmetic scale.
Using a log scale Black Monday is much more prominent. Furthermore, the problem in 1987 was not the fateful day itself but the summer of that year when the price of the DJII continued to rise as market participants indulged in the very human propensity of projecting the recent trend ad infinitum. Only to be brought back to reality as long-term interest rates rose and the dividend discount value of the DJII fell to 1,700.
While the continuation of irrational pessimism since Lehman has held the price of the DJII below its dividend discount value their respective directions have most certainly been in concert. As long as long term-interest rates remain low and dividends continue to rise the direction of both the value and price of the DJII should be up. Any pullback in price such as that displayed in the “W” formation over the past three quarters should be pounced upon by investors and punters, such as the so called “hedge funds”, alike. This is particularly so when the hedgies are having to cover short positions as it appears they had to do so in October and November last and the latest run since February 11, 2016.
