Where is the Dow & others heading in 2005?

2004 has not been a bad year for the Indices but where do we go in 2005?

My Technical View is that although we are in the seasonal bullish period for the year, we could be in for a little narrow range trading and then lower....

Normally I would go long for the seasonal period as stats favour upwards moves. However a great technical indicator the 'VIX Index' is dangerously low and has closed at the lowest level since the new numbers were enforced. Fridays close 11.950.

Typically, VIX has an inverse relationship to the market. The further the VIX increases in value, the more panic there is in the market. The further VIX decreases in value, the more complacency there is in the market. As a measure of complacency and panic, VIX is often used as a contrarian indicator. Prolonged and/or extremely low VIX readings indicate a high degree of complacency and are generally regarded at bearish.

Comparing VIX action with that of the market can yield good clues on future direction or duration of a move.

I would look to sell this market as a kick back to say the least is on the cards. It could happen before the year end but then again it may not as its seasonal bullish period. If it does not then we shall range trade which could lead to some great declines starting in early 2005. Otherwise the decline may start earlier then anticipated.

I have had a bullish view on this market since March 2003 as the VIX was VERY high and was screaming at traders to buy into Indices. (High reading meaning, immense panic). Over reaction.

I would be quite comfortable in shorting this market over the next coming days and if the market continues going higher due to good seasonal spirit then so be it. I would be happy to add to shorts if the market heads higher.

I will soon be heading into a bearish stance on the indices. Technically, 10700-10800 should give the Dow Jones a very hard time as these levels gave the Dow a peak in March 2002, Jan and Feb 2004 and possibly once again NOW. If not then we head a little higher but that would be a surprise and for 2005 I believe markets will trade lower.

The first year of the presidential cycle tend to be negative years and as the President has one power he can afford to let out bad news in this year.

DONT Forget, markets such as the S&P and Nasdaq etc have already hit highs for the year and it’s only indices such as the DOW Jones and Nikkei that have been laggers in comparison to some other indices. So the seasonality bullishness could well be done for the year as far as S&P, Nasdaq etc are concerned.

If you do decide to short this market then watch for the following numbers as possible support areas for the next year: 10500, 10400, 10200-150 and 10000 etc. As we do not know the downside potential many of you may want to use the Fibonacci retracement lines or simply you could watch the Vix Index readings. www.stockcharts.com tick symbol: $VIX

Good luck with trading the Indicies.

User,

I am not so sure that I agree with your interpretation that a high VIX reading means total panic whilst a low VIX reading means complacency.

VIX is a measure of volatility, not direction.

Volatilities of most major equity markets have been in a steady decline. This is simply a reflection of narrow trading ranges.

I suspect that the emergence and growth in the use of derivatives, contrary to popular thinking, has actually reduced volatility as opposed to increased it.

I would agree that perhaps the next direction of VIX is up, but the does not mean that markets are starting to "panic"

I might even suggest that many market players such as hedge funds have witnessed the narrow trading ranges and have chosen to trade short strangles in the options markets as a way of making at least some money in these markets. The consistent selling of option premium at both ends of the market range has resulted in lower implied volatilities.

The VIX may increase, but that doesn't suggest the market is going down. The VIX can also increase when the market is rising. Remember it is a measure of the market's volatilty, not its direction.

Airthrey Capital, no doubt we share different views and definately our portfolios are different to one another thats what makes the 'market'.

Lets just say I'm not doing to badly and I thought I'd give some good advice.

Follow if you want, it shall be profitable.

Good Luck.

Check Attachment

The fundamentals do not support higher stock markets in the US now or into the near future. Unless there is an explosion of earnings, ever higher ratings cannot be justified so at best the markets will mark time around current levels. Tech stocks are already priced for supersonic earnings growth and have little or no yields to talk about so you can discount them on the upside. One minor transaction that recently took place in the sector was the purchase of an IBM subsidiary by a Chinese entity, whilst it might not have grabbed too many headlines, it should start alarm bells ringing. The Chinese can now manufacture their own computers and are no longer reliant on imports (ouch), this means less sales for the likes of Hewlett Packard and Dell.

The telcos are under severe threat from voice over the internet which leads to erosion of margins, falling revenues, redundancies and lower profits. Witness the moves made by Hutchinson in the UK; selling or giving away state of the art phones in order to attract new subscribers.

Who are the latest targets of Elliott Spitzer? The Music industry. They will pay the price like others before them for breaking laws and fleecing the public. Do people ever stop to ask who the losers are in these cases? Shareholders. The drug sector seem to be beset with massive problems, it is like roaches coming out of the woodwork and each week brings another one.

Just as the bulls thought it could not get any worse and Fannie Mae comes along to wreak havoc in the financial sectors. This has the potential of making the woes of the drug sector look like a minor headache and shake the banks' very foundations, at worst, it could lead to a crisis.

How long can the markets ignore the twin deficits; falling dollar; rising commodity prices and the rising number of companies filing for Chapter 11? For those that have been around long enough, it is time to dust off those magazines and books and revisit the 1980s. The Japanese claimed that they could defy gravity and Western style stock valuations did not apply to them, their stock markets were the largest in the world. A few years later, stocks tanked and have continued downwards ever since, they are still over 72% down from their peak. Every now and then, we hear that Japan has turned the corner and it is a new era; new gullible investors get sucked for 6-18 months before finding out that they have ended up with dreadful investments. That cannot and will not happen to us, I hear you say; think again, the Japanese uttered the same words. They tried all the tricks in the book to avoid it but they ultimately failed.

Back to the original question - Where goes the DOW in 2005.

Answer:

Down a black hole. A fall to 6500 would be appropriate and provide fair value (I do not need psychiatric help). Rising interest rates do not bode well for stockmarkets and it is very difficult for shares to rise when bonds are falling.



These are my personal views and you act on them at your peril.

MERRY CHRISTMAS.

chaps quick comment.

i do not know (and do not care as a day trader ) where the mrkt is gonna go next year but I am sure there will be a 200+ SPX points difference btwn Jan 1st 2005 and Dec 31 2005. Bets accepted, say 50 quid per point?

Have a word with your broker

Let me know how you get on.

Like CW, I'm agnostic about market direction next year, BUT .... I certainly lean towards L63's analysis.

Mine goes something like this: - Secular bear began in 2000; 2003 to present + 1-2 months??? a counter (secular) trend rally; We'll see lows to match those of 2003 (at least) over the next 2-3 years. That's the picture that sits behind my own trading activity - buy and hold equity investors beware in other words!

But for day/swing trading purposes, the most I will (try) to have it influence me is to be a little more wary of getting caught long than a short. Probably not a bad principal anyway since down moves on pretty well every tradeable timescale are usually much sharper than 'wall of worry' ascents.

Looks like the Santa Claus rally will carry on into 2005

I think this upward leg is limited and the month of January 2005 should prove very difficult for any positive gains.

I am a technical trader and like to move on price action but it is hard to ignore fundamental concerns. We should see 10,000 soon and any attempt towards 11,000 should be brief.

We might be seeing 12,000 soon.

1900

saxo98 said:

According to cbs.marketwatch.com on Tuesday the Dow has been in positive territory EVERY year ending in "5" since 1905.....

Click to expand...

what about 1900? it was down in 1900, not much but down?

funnily enough I have recently seen an article on 21st century claiming that since 1980 every multiple of 5 yr was an aup year, i.e. 1985,1990,1995,2000....

the problem is it is a very small sample - 5 points - for any statistical accuracy.

even in your example - there were 10 yrs ending in 5. Therefore statistical error on ANY conclusion made on those 10 yrs will be roughly SGRT(10) = 3.2

which means the following - from that statistical sample the yr of 2005 will be an up year with a probability of roughly 2/3rds.

I am not trading on such odds. There are better set-ups with better odds. My opinion only.

Vix

Hi

Here is some good VIX analysis

www.zealllc.com/2004/vixspx.htm

cheers

mark

Nice article Newport.

If you see at the start of October the VIX reading was telling us to sell. The DOW was around 10200. Then at around 25th November the VIX was telling us to buy at which point the Dow was at the low of the year at 9750. That would have been a profit of around 450 points.

At around 12th Nov the Vix was telling us to sell again, which would have given us a profit of around 700points.

Of course the Vix has been signalling a sell since around 12th Nov and up to the 10/12/04 the VIX was in a narrow range and so was the Dow which was in a range from 10400 to 10600.

The Dow Jones has now broken 10600 and has now reached above 10800 at the same time the Vix broke its narrow range and has now travelled to new lows at 11.230.

This reading of the VIX is a major sell signal.

Let’s just put things into perspective. Think about this carefully.

At the time when the Dow Jones was at the lows of the year ONLY 2months ago many of us would have been panicking and thinking the Dow will go lower and obviously it could have gone lower. The Vix was telling us to buy at that point.

Now we are at the highs, we are thinking it will go higher. Enthusiastically optimistic, and of course it could but the VIX is screaming at us to sell and that corroborates well with history telling us that the first year of the presidential cycle which is 2005, tend to be down years.

I will be looking to short very soon as mentioned before.

Your trading direction is your choice and analysis. If you currently hold long positions on the Indicies as seasonality trades then you may consider putting in tight stops.

Good luck, interesting days and months ahead.

Happy New Year to all, I hope you all have fun and profitable trading in 2005 along with good health.

Kind Regards
User

What a reversal we're seeing on the Dow today from the highs. Today could be a significant day.

I think its time to short this market. Its starting to show weakness and now the institutional money is going to have its say as to if their capital is in or out.

Quite simply I think they are selling at high levels. Which is what we are seeing in todays session.

I shall update later.

Goodluck

Sell the Dow, S&P and Nasdaq.

Normally the Nasdaq is a leader on the the way up and a leader on the way down. Yesterday the Nasdaq was leadng the way down and same is happening today.

The Vix is rebounding from the lows and we could be seeing 10,000 before we see 11,000

The markets have had the seasonal rallys.

Now the institutional money is to dominate the tone over this month. By the looks of it they are starting the year by cashing out at high levels. Small investors should be following suit.

So how do you guys think the nasdaq/dow will do short term? Average jan gains over the last 35 years for the nasdaq have been 3.9% (dow 2%) and since it's gone down so much today do you see a rally up sometime soon? Or do you think it will just continue down?

Wait and see this week, the jobs figure out on Friday is widely anticipated.

The Vix index is pointing towards more weakness. This two day decline could just be long positions cashing out and automatic stop loss orders being trigered.

Stats favour gains but wait and see this could be a down year and January may well set the tone for the year as it usually does.

Buy buy buy they all say, the DOW is headed for 14000 before the year runs out. Bush is due to change the law regarding pensions and this will lead to an inflow of $100 billion into stocks. The falling Dollar will lead to higher profits for US companies that have international subsidiaries. The threat of terrorism will lead to rising defence expenditure leading to a boom for defence contractors. The rising number of IPOs, merger mania and share buy backs are all good for the markets. The falling Dollar will reduce the trade deficit as US goods become cheaper abroad.

Those are just a few of the arguments put forward by the bulls and a few of them are very soundly based. However, before we all reach for the mouse to click on those buy orders, we should stop and ask a few questions.

1. How long will it take Congress to enact such legislation? Not this side of the New Year.
2. How many mega mergers have been of benefit to the shareholders of the acquiring company (answers
on a postcard).
3. Can profits continue to grow faster than GDP and what happens when there is no longer any corporate
fat to cut?
4. How can a falling Dollar help narrow the trade gap? Okay, they are right, exports are cheaper and that
should mean more orders. Sorry, I think I forgot to mention that imports become more expensive and
this in turn brings higher inflation, which leads to higher interest rates to curb inflation which means
that bond prices fall and oh no; they take share prices down with them.

But we do not need to worry about that, we are still bleary eyed from the wine and bubbly that was consumed during the festive season. All hangovers come to an end and with this one will come a big reality check. (I think it is time I change my name to Bear63).