wednesday wranglers, page-181

Thanks Pete - that's a good compliment coming from a master chartist. I try to be balanced but mostly I'm just confused these days.

The long range chart is interesting and even a bit alarming if you remove the effect of inflation (see below). Perhaps I would have been more bearish if I had seen something like this that looked beyond the recent period of history.

Still there are plenty of valid criticisms:

1) Especially for ClarkKent - it ignores the effect of dividends and other bonuses that mean there are greater returns in owning shares than simple capital gains.

2) Its very sensitive to inflation. There's some discussion on the web site about this and going by one (unofficial) measure of inflation we would already at be the bottom. Pumping money into the economy won't increase real wealth but should increase the value of stocks and other assets relative to cash. Eventually this should be reflected in share prices.

3) Reverting back to a trend line needn't involve a sudden crash. It could just as easily go sideways for years or even up with a lesser gradient.

4) Long range charts don't recognize that there have been major structural changes to the economy, financial system, markets and even the make up of the Dow. The data just isn't consistent over this period. There's not enough of it to make any certain projections either. There are only a few complete cycles and a fair amount of randomness.

5) Its only a chartist's observation and not some immutable law. Very often chartists end up moving lines to allow the theory to fit the circumstances. Charts are often constructed to fit a theory to begin with. The time period selected seems especially important.



http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Outlook.htm