September 23, 1999 – In a continuation of the sell-off that began a few weeks ago, the Dow Jones Industrial Average today closed down -205.47 points, breaking below key support. This break of support is an important signal that should not be ignored.
Today’s action in the Dow suggests that a major top in the market has been firmly put into place over the last several months, and that we have now begun a bear market. The accompanying chart puts the current position of the Dow Jones Industrials into perspective.
I would like to make a few points about the stock market in general, beginning first with the accompanying chart. The Dow Jones Industrial Average remains within its long-term uptrend channel. Also, this widely followed average presently is still above its 200-day moving average, so it is possible that we are seeing just a correction in an ongoing bull market. However, the break down from the small trend channel that has been forming over the past several months looks like a topping formation, not a pattern that might form before a correction.
In any case, if the Dow’s 200-day moving average, currently at 10,252, is broken, the next level of key support doesn’t come in until the mid-9000’s, and that’s a long way down from here. It could be a scary decline, particularly in view of the broad-based weakness that we have been witnessing for months.
I have been writing about that weakness in recent letters. And the most glaring example of that weakness is “;the alarming divergence between the Dow Industrials and the S&P 500”;, to use my words from the last letter. The point is that the recent new high in the Dow Industrials was not confirmed by a new high in the S&P 500.
Such divergences between the major averages historically have proven to be a classic pattern at market tops. Given the extreme level of over-valuation in the stock market today when measured by time-tested indicators such as P/E ratios – which are now sky-high when compared to historical norms – and other trusty, proven indicators such as dividend yields – which are minuscule by any measure – this stock market is on very shaky ground. ¤
My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.
