We’ve Seen this Trend in the Dow 17 Times Before

By EidoSearch

“It’s like deja-vu all over again” – Yogi Berra

This past Friday the Dow Jones rose 25.62 points to close at 16,947.08, besting the previous record close set days earlier.  Because of investors experience in the markets, instead of celebrating they are mainly asking the question, “when are we going to get the correction?”

There’s growing consensus that a drop will happen sooner rather than later.  Discussions continue to center around the fact that valuations, not just the markets, are at all-time highs.  Technicians are concerned about declining momentum and deterioration of market breadth and historically speaking the Dow is overdue for a correction.  In fact, according to Dow Jones Analysts, the Dow Jones Industrial Average experiences a bull market correction of 10% or more every 12 months on average.  The Dow is now up for its 32nd month in a row without a correction.

However, the fears don’t seem to be able to get over the top on the positives.  Volatility is near all-time lows, recent unemployment numbers were better than expected and the fed continues to trim their bond purchasing program signaling their confident enough in economic growth to do so.

How do we get an objective response to this question on a market pull back?  There’s no way to model this traditionally.  There are way too many factors to incorporate.  The only gauge is experience.  Investors can apply their experience, and recall when there have been similar environments so that they can better understand how this is likely to play out and how to position their portfolios.

The problem is that investors can’t be expected to recall or even know about ALL of these similar instances and our subjective nature can skew the results in one way or the other.  So, can we do better, i.e. can we get an objective gauge for what the range of likely outcomes are based on experience without bias?

EidoSearch looked at the 6 month price trend for the Dow Jones as of Friday’s close, and through our pattern search technology identified 17 similar instances of the current price trend dating as far back as 1980.  What are the range of likely outcomes based on historical precedent in similar environments?  The Dow has been up in 16 of the 17 and the average return is 5.9%

Six month price chart for the Dow

Dow chart

Three month forward returns for each of the 17 historical instances of the current 6 month price trend.  The only instance where the Dow is down in the next three months is in 1997Dow returns

EidoSearch is not a black box signal, and many underlying analytics incorporate the projection and distribution of returns including the historical instances themselves.  Our clients are able to quickly discount or confirm the validity of the instances for their purposes to add meaning to this data as part of their investment process

Dow table

Replicating the Market Call in EidoSearch (Clients Only)

  • Go to New Search tab, select Indices, type in $INDU and hit Enter
  • Select the 6 month tab at the top of the chart, and then hit Search One at the bottom of the chart (Searching just the history of the Dow)
  • Click on Return Chart to get the projection, as well as the historical analogs and other underlying analytics
back to top