Dow 12000 Illusion Or?

By: Sol Palha | Sat, May 13, 2006

"A hallucination is a fact, not an error; what is erroneous is a judgment based upon it." -- Bertrand Russell 1872-1970, British Philosopher, Mathematician, Essayist

Main parts extracted from April Market update but updated to reflect current data and events.

First thing you need to do is look at the level the US dollar index was trading at the time the Dow traded to its all time high as the Dow is priced in dollars. The Dow put in its all time new high around Jan 2000; at that time the US dollar index was trading in the 105-120 range. So if the Dow traded to say 11790 for this high to be valid the Dow would have to trade at 11790 with the US dollar trading at least around 105. The US dollar index closed today at 83.82 (This is all illustrated graphically below).

The Dollar is currently trading roughly 20% lower (on the low end) than where it was trading in Jan 2000. Therefore the Dow would have to trade 20% higher then the high put in Jan 2000 for it to be a truly valid new high. We are willing to bet that the majority (including newsletter writers and financial analysts) will miss this simple common sense concept and start to scream that the Dow is indeed trading at an all time new high; leading the pack will probably be the Dow theorists.

So the Dow would actually have to trade to 14040 to put in a new all time high; sadly we do not see this happening anytime soon. So even though we expect the Dow to put in several illusory highs they will not be true highs. Welcome to the sneaky world of currency devaluations and inflation (the silent killer tax).

Now if you happened to get this answer right then pat yourself on the back.  Another way would be to divide the value of the Dow by an ounce of Gold and compare it to the level the Dow was trading In Jan 2000.

In 2000 one ounce of Gold was worth about 300 dollars. 11700 divided by 300; it took 39 ounces of Gold to buy the Dow back in 2000.

Now if the Dow trades to 11790 it should take slightly more then 39 ounces of Gold to buy the Dow if it is indeed a new high. Let's see where we would stand if the Dow traded to 11790. Gold closed today at 716 dollars. 11790 divided by 714 gives us 15.98 ounces; it would take 15.98 ounces to buy the Dow if it traded to 11790 (almost a whopping 60% drop in price). Clearly the Dow will not be putting in a new high if trades to 11790. Using the Gold method the Dow would have to trade to 27924 (716 X 39) to actually put in a new high and there is no way in hell we are going to trade to that level anytime soon.

Other variations of this answer would be to use Silver, Platinum etc.

With silver it took 2166 ounces to buy the Dow back in Jan 2000 today it would take only 803 ounces to buy the Dow. However for the Dow to trade where it was trading in terms of Silver back in Jan 2000 it would have to trade all the way (2166X14.17) to 30692; clearly this is not going to happen anytime soon.

Conclusion

While it appears that the Dow has put in several multi year highs they are not true highs because the US dollar itself has lost so much of its value that just to break even the Dow would have to trade 20% plus higher. If we use Gold or silver to price the Dow then the Dow would have to trade almost 60% higher just to match its old all time high. This clearly illustrates how the masses are being fleeced while being led to believe that everything is fine and dandy. The phrase "it's like taking candy from a kid" comes to mind.

"We live under continual threat of two equally fearful, but seemingly opposed, destinies: unremitting banality and inconceivable terror. It is fantasy, served out in large rations by the popular arts, which allows most people to cope with these twin spectres." -- Susan Sontag 1933-, American Essayist

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

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