Is The Dow Jones Industrial Average Similar to 2007/2008 Now?

By Jim Donnelly, Olson Global Markets

A clear sense of unease, underscored by another stunning flight into U.S. Treasury securities, has engulfed the equity markets. An unexpected 500K jump in initial weekly jobless claims reinforced the notion that that employment picture is far bleaker than previously thought. Adding to this dark economic outlook was a report issued by Fidelity Investments on Friday noting that hardship withdrawals from 401(k) retirement saving plans rose to the highest level in 10 years during the second quarter. Further, Fidelity reported that the percentage of 401(k) participants that had an outstanding loan against their account rose to a record high of 22% during the second quarter, with an average loan amount of $8,650.

With a number of economic observers worried that the Federal Reserve may be “running out of bullets” in the attempt to turn around and sustain an economy recovery, investor confidence has become more unnerved. Renewed fears over Greece as well as concerns over domestic municipal budget woes resurfaced last week as well.

With a backdrop of continued equity fund outflows and an increase in “fixed income” or bond fund inflows, it may be worth noting that the Dow Jones Industrial Average appears to be forming an unusual type of Head & Shoulders pattern that appears very similar to one that developed between 2007 and 2008. In both cases the “neckline” of their respective patterns is characterized by a steep downward sloping pitch. Of course, the current market for the DJIA is 3,000/4,000 points lower than during the 2007/2008 period, which is worthy on note since Head & Shoulder patterns often show up at extremes in the market. While the current market maybe relatively extreme when compared with the March 2009 selloff low, it is not similar to the 2007/2008 buying extreme, which set an all-time high for the DJIA back then.

Nevertheless, “patterns within patterns” technically can often be of a similar nature, akin to having the same sort of DNA in a sense. In this context, the hangover from the fear of an economic meltdown from a few years ago has not yet worn off, either domestically or globally. Memories of that period’s tumult remain fresh in many investors’ minds. Oddly, that may well be a good thing. After all, a lot of selling of equities has already occurred, with “cash on the sidelines” already tucked into extraordinarily low yielding U.S. Treasuries, FDIC insured bank CDs, corporate bonds and notes, gold, silver and, perhaps, into the safety of mattresses! Recently, a few well known hedge fund managers also tossed in the towel and closed up shop.

Although the DJIA may resemble that of 2007/2008 technically, market sentiment is very, very different. Still, equity markets do not like uncertainty which seemingly abounds today. Many changes, including the Health Care Bill and FinReg have decision makers at the business level handcuffed due to the technicalities of implementation. That condition, by itself, will tend to retard job growth. In the end, these kinds of concerns may well force investors to pay heed to the unusual looking “Head & Shoulders” pattern that may be developing now.


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