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Long Term Chart: Inflation Adjusted Dow Jones Industrial at Trader’s Narrative

Speaking of inflation (or deflation), it has been 8 months since we looked at the inflation adjusted chart of the Dow Jones:

Dow Jones inflation adjusted Feb 2010

We’ve had a sharp bounce, but when we step back and take a really long term view, we are still in the middle of a very wide upward sloping trading range. You might recall that during the really dark hours of the bear market in late 2008 and early 2009 there were more than a few calls of Dow 5,000 as a downside target. In the aftermath of the 1920’s bull market we fell down to the lower edge of the range very, very fast. During the aftermath of the 1960’s bull market it took much longer.

I think we are still in a long term secular bear market according to the 18 year cycle of the stock market. But honestly, I have no idea how we are going to get to the lower ledge - if at all. If we’re honest about it, no “guru” knows this either. The most reasonable explanation would be a protracted trading range that would see prices move sideways. Especially as they are eroded slowly by inflation. That level is also support from a horizontal resistance/support line which lies at the top of the 1920 and 1960 bull market tops.

Also, the Dow is trading 57% higher from its low in March 2009. That is slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today (54%). And from an inflation adjusted point of view, the Dow has only managed to double in price from the 1929 top. It is easy to lose sight of the big picture when we are so engrossed in the day to day minutia of the market movements and news. That’s why it is so vital to have a bird’s eye view every once in a while to get some perspective.

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6 Responses to “Long Term Chart: Inflation Adjusted Dow Jones Industrial”  

  1. 1 how

    nice work, babak

    looks to me that chart could fit into the EW 5 wave count, which would predict that we are in a correction that could correct the advance of about a century. would you consider this as valid, babak?

    i made a post expressing similiar opinion back in january using another chart which you guys already discussed in ‘09 (didn’t realize that…)

    good weekend to everyone


  2. 2 Babak

    Pete from Fibocycle passed along this really interesting annotation of the chart above, take a look:

    inflation adjusted Dow Jones Industrials annotated

  3. 3 jezza

    Babak, you are overlaying your personal bias onto that chart, we would have to go below the March low for you to be rationally bearish-are you still reading material perhaps?

    Goldmans thinks that Tresuries have topped, oddly, they believe yields are now set rise, this would be a first in a deflationary enviroment!

  4. 4 Fibocycle

    I have noticed another interesting harmonic on the chart that I recently took the liberty to annotate.
    If you extend the “B” area from 1965 top by a factor of 1.272 which is the square root of PHI (1.618) the line extends to near the double top in 2006-2007.

    I have found that this harmonic 1.272, or its inverse 0.786, are often quite accurate with regard to ‘time pivots’. The fact that the utilization of the exponential aspect of PHI is compatible with time functions is not surprising. (see BlackÔÇôScholes model for another example of the exponential use of time in an Algorithm.)

  5. 5 Babak

    Jezza, not sure where you’re getting this “bias” of mine. I’ve written countless times of the similarity between this rally and 2003-2004’s rally. So I’m looking for a sideways grind. As for Treasuries, well before GS came out with that call I was writing about the bubble in bonds (as were others of course). You seem to have a very warped perception of my views on the market. Anyway, hope that clears things up somewhat for you. Cheers

  6. 6 Zeb

    Actually, in terms of raw correlation, the time period most similar to the 2009 rally is the rally from 1962 to 1965. It lasted a bit longer from the bottom to the top, but if you look at the chart of the Dow during that period, the similarities to now are pretty close. 2003-2004 is not the best comparison.

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