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-- Posted Wednesday, 12 February 2003 | Digg This Article
Dow 2561? Compared to Bob Prechter’s prediction that the Industrial Average eventually will trade well below a thousand, 2561 is a relatively upbeat estimate of how bad things might get. The forecast comes from longtime subscriber Gary Van Zandt, whose imaginative logic is tied to the performance of…Coca-Cola (KO). This is one I am sure you will want to savor. Gary writes as follows: “Dow 2,561 – is it possible? I decided to take just one stock, Coca-Cola (KO), and see how low it might go in a real stock-market crash. At its mania top KO was selling at about 60 times trailing earnings yet it was never worth more than 20 times earnings, which means that it was selling for about three times what it was worth at its peak. According to my "rubberband theory," a stock that sells at three times what it's worth should someday sell for a third of its worth. Taking this year's (Dec. 2003) estimated earnings of $1.93 and multiplying by a 6.67 PE gives a price of about $12.87 per share. Today at Dow 7,864.20, KO closed at 39.53. Therefore, KO has a downside potential of 67.44 %. The equivalent decline in the Dow would result in a Dow low of 2,561. “Is KO more overpriced than the average Dow stock? Maybe. At 12.87, KO would have a PE of 6.67, yield 6.14% and be at about 1.2 times its book value. To me, those numbers seem too good to be true, but anything is possible after the greatest mania in the history of the world. My "rubberband theory" suggests that such a level is possible for KO. Greenspan Flip-Flop “Greenspan certainly would look like an idiot after saying that manias shouldn't be stopped because it might cause more harm than just letting them run their course. Letting half the American families squander their life savings by buying very overpriced stocks doesn't seem like a wise economic policy to me. Letting millions of Americans buy essentially worthless internet stocks seems like government-sponsored fraud to me. Why did the government allow these worthless stocks to be sold in the first place? “What is really amazing about this three-year-long bear market is that on long-term charts the popular averages looks more like they are just now completing "topping formations" rather than finishing a bear market. Again, taking KO as an example, it has just given a long-term sell signal by going below its 40-41 support area that has held declines since 1999. The stock is just starting its bear market with a current PE of 24. During the 1987 crash, the stock briefly dropped to a PE of 10, and during the 1980's its PE ranged from 8 to 10 for years. If this crash ends up being as bad or worse, a 7 PE is not impossible. The stock is almost certain to sell in the teens sometime in the next year or two. Not Your Typical Bear “I've also noticed that many market-newsletter writers are expecting a series of bear markets like in the 1970's and 80's. However, I have a feeling that this bear market is going to be more like the 1929-32 and 1972-74 affairs in which the market keeps going down until the final long-term, cycle bottom is reached. Then the market will probably form a gigantic triangle lasting a decade or more before finally challenging Dow 10,000 again. “Personally, I believe that the form that a bear market takes is related to the degree of mania that preceded it. The present bear market is following the greatest mania in world history and is not likely to end with a series on small bear markets like those seen in the 1970's and 80's. Stocks were much, much more overpriced in 2000 than they were at the 1966-68 market top. The amount of mania that needs to be corrected this time is much greater. “Interestingly, as late as Spring 2002, some market averages were still making new highs. Investors were still very optimistic and believed that they could avoid the bear market through stock selection. This is similar to what we saw with the nifty-fifty of the early 1970's. The bear market that followed their top in Jan. 1973 lasted almost two years, until December 1974. This seems to indicate that the bottom is at least a year-and-a-half away.” [The + symbol means we have an open position, while $ means there is actionable advice.]
Gold
APR GOLD (353.00): The April contract got socked yesterday for its worst one-day loss in recent memory, but that did nothing to alter a still very bullish big picture. We’ll note once again that a correction to as low as 344.86 would not even blemish the bullish look of the intermediate- and long-term charts. Yesterday’s low, meanwhile, was 352.50.
+ GG (11.60): We hold 200 shares for an average 4.65, and no changes are contemplated. The stock will need to close above 13.77, or trade more than six cents above that price intraday, to get off the launching pad. Thereafter, we should assume it's on its way to a longstanding target at 15.72.  
DURBAN DEEP (NasdaqSC:DROOY) : Quote - News - Profile - Message Board - Website
$ + DROOY (3.81): We own 600 shares for an average 4.38. One more time, let’s bid 3.69 for 200 shares, day order. That’s an important hidden-pivot.  
RGLD (25.25): The closest Fibonacci support lies at 21.12. Royal may not need a correction of that magnitude to find traction, but we should allow for it just the same, since it would be natural and healthy in the context of the stock’s very steep uptrend since late July.  
$ DJIA (7758.17): The relentless and unnervingly orderly decline of the last umpteen days has brought the Dow to within shot-put distance of our minimum target for the near term – 7467.65, a hidden pivot. If that support is exceeded by more than five points, however, we should infer that the next pivot below it, 7163.85, is likely to be reached. You can bottom-fish in either place, but it will be at your complete discretion. FYI, there is a minor pivot at exactly 7726.76 that represents the Dow’s best hope for a bounce if it is to avoid the predicted dive to 7467.65. $ E-Mini S&Ps (817.00): Yesterday’s bottom fell within less than a point of the hidden-pivot target we’d flagged at 815.50, but the resilience of that support this morning cannot be predicted with sufficient confidence to warrant our trying to bottom-fish there. If the pivot is breached decisively we should infer that the futures are magnetically on their way to the 793.75 pivot that we’ve been using as our minimum downside target for the near-term. When the time comes, until the final hour, you can bottom-fish by way of a 793.75 bid for a single contract, stop 792.75. A 2.50-point trailing stop should be substituted above 798.00. MAR BONDS (112.22): If the futures close up on the day, we’d rate them an even bet to take out late December’s high, 113.26. If it is a flight to quality rather than, say, a reaction to a rally in the dollar, gold quotes will confirm by surging higher. OEX (413.61): Yesterday’s decline stopped about a point-and-a-half shy of our 411.87 target. That pivot remains viable as a potential support/inflection point, but because of the usual uncertainties attending first-hour price action, I am no-longer recommending that you try to bottom-fish there. If the support is breached even slightly, we should assume the OEX is on its way lower, to around 400. QQQ (23.82): Yesterday’s bottom fell at 23.18, just 0.08 points beneath our minimum target. That may not sound like much of an overshoot, but it’s probably sufficient to imply that the downtrend has farther to go. If the cubes dip below 23.18 even slightly today, we see precious little support materializing until 22. APR GOLD (353.00): The April contract got socked yesterday for its worst one-day loss in recent memory, but that did nothing to alter a still very bullish big picture. We’ll note once again that a correction to as low as 344.86 would not even blemish the bullish look of the intermediate- and long-term charts. Yesterday’s low, meanwhile, was 352.50. MAR NASDAQ 100 (958.50): The futures did not even get close to triggering our bullish signal yesterday, implying the decline will continue. If so, our minimum projection for the near term is 966.00, a hidden pivot of middling importance.
-- Posted Wednesday, 12 February 2003 | Digg This Article
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MarketWise Black Box is published on weekdays 240 times per year. Copyright 2003 by MarketWise. For further information please go to www.marketwise.com. All information was gathered from sources believed to be reliable The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk s should be used for such trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
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