The Dow Jones Industrial Average is overvalued any way you look at it.
The chart below shows four different technical perspectives. Each of these confirms the view that the market is a heavy rock at the top of a hill.
1) 10-year linear regression (yellow line): this shows the “average trend” over the past 10 years. The DJIA is currently trading above this trend. Overvalue: 6%
2) 200-period Moving Average (blue line): this shows a rolling average of the past 200 weeks. The DJIA is currently trading above this average. Overvalue: 19%
3) 10-year linear regression of the 1980s/1990s (green line): this shows the “average trend” from roughly 1985 to 1995. If this steady path had been sustained, the DJIA would now be trading around 8,200. Instead, it’s well above at over 12,000. Overvalue: 54%
4) “Bubble Begins” (pink line): the Dow’s growth turned from linear to exponential in the mid-1990s, at roughly 4,000. Overvalue: 193%
As you can see, it’s difficult to make a case for the Dow being undervalued.
Over the long run the market is efficient… just like gravity. That’s why Ben can only keep pushing this rock up the hill for so long. Eventually gravity will prevail. When it does, the Dow will easily drop below 6,000… and possibly much lower.
If you haven’t done so already read the Survive & Prosper issue on “Dow Today is at a Record High But For How Long?”.