The Dow Jones Industrials has a very interesting long term chart, particularly the +20 year chart. Between 1998 and 2011, the Dow Jones traded in a sideways pattern, while before and after that period it was in a secular bull market. It is not really fair to say that the stock market is in a bubble right now, although, on a shorter timeframe, a bubble view could be visible.
Most investors have the perception that the 2000 and 2007 tops were followed by bear markets. While that is correct from a tactical perspective it is much more ‘nuanced’ from a secular perspective. That is why it is always recommended to look at long term charts. The Dow Jones Industrials is no exception, its long term chart shows a different picture than the shorter term charts.
The long term chart of the Dow Jones Industrials Index on +20 years
The general perception and feeling is that 2007 was a long term top for stock markets. While that is true, from a secular perspective, on a very long term chart, we observe a sideways pattern. Moreover, on the chart below we see a textbook ABCD pattern. What does that mean to investors?
Markets typically move in an A-B-C-D pattern. AB is an upleg, BC is a retracement and CD is another upleg. The following image makes the point (source). The above chart shows an AB upleg until 2000 and a BC retracement between 2000 and 2009. Next, we see an upleg after 2009 (with a real breakout since 2012/2013). So the last CD upleg has started only 3 years ago.
That implies that the potential upside is still considerable. Typically, the legs AB and CD are similar in length.
Although we are not pretending that the Dow Jones will soon trade at 40,000, there will probably be a day that it will be that high, unless things have changed drastically in markets, which we don’t exclude neither.
Obviously, stock markets will correct sooner or later. Our point of view is that the current upleg will be stopped in 2017, but the correction is likely to be a blip on a very long term chart. Look at the 1991 or 2015 crashes, those also look like a small blip on the long term chart.
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