Despite the severe sell offs and the sharp rallies the DJIA is virtually unchanged over the past six months. 

Dow drops 1,500 points in August . . .

Rallies 1,700 points in October . . .

Drops 1,400 points in November . . .

Rallies 1,100 points in December . . .

Drops 740 points in December ???

Roller Coaster Ride of the Dow Over the Past Six Months 

Net Result: DJIA Virtually Unchanged

 Dow Jones Industrial Average June 7th through December 7th 2007

The 2007 – 2008 stock market is following a similar pattern that occurred during the 1990 – 1991 stock market. In 1990 the US was at war in Iraq just as we are in 2007. Between July 1990 and August 1990 there was a sharp 18% correction in the DJIA similar to the 12% correction in the DJIA between July 2007 and August 2007. In 1990 there was a crisis in confidence for US banks and financial institutions and financial stocks incurred severe losses. A similar pattern has unfolded for financial stocks in 2007. In 1990 there was a capital infusion into Citigroup from Middle Eastern investors just as there was in 2007. There was also a severe real estate downturn in 1990 just as there is in 2007.  

There was a short, mild recession at the of 1990 that lasted until March of 1991. But the stock market had already discounted a recession and stocks started to rally in December of 1990 and there was a strong bull market in 1991. The S&P 500 Index produced a 31% return in 1991 and the NASDAQ produced a 57% return. I think we will follow a similar pattern in 2008 with a mild economic downturn that is currently being discounted by the stock market. Over the near term if the S&P 500 Index can stay above its five year trend line of 1400 I think the stock market will rally in 2008 despite the doom and gloom forecast by the financial media. The average Price/Earnings for the S&P 500 Index stocks is currently 15. Stocks are undervalued in relation to low interest rates which will probably result in an expansion of the P/E multiple in 2008.  

The doom and gloom is pervasive and there is currently record short interest in the stock market which could lead to an explosive rally in 2008 as the shorts get squeezed.

 Chuck Hughes