from “W” to “I”

“W” theory, also known as “the Dow Theory,” was created by Charles H. Dow (1851–1902), who cofounded the Dow Jones and Company. In simplest form, the Dow theory argues that the performance of a stock market is zigzag, just like the “W.” (Or M if you extend the W.)

Now the market neutral investors have revisited the W theory to predict that the decline of the market price is a normal trend, justified by the W theory.

Interestingly enough, many theorists and investors start to speculate the market directions, so that they have to “invent” something to justify the reasons, otherwise they might lose their jobs.

One theory is V theory, as many have already known, that the market will reach the bottom at the end of this year, or around that time, according to (you can find out through any search engine online.)

Another theory is L theory; the “L” argues that since we have experienced the largest drop of the market price in such a short period of time, job losses is increasing, the huge debts is skyrocket, and the gloomy economic perspectives has hurt investors, the economic recovery will take a long delay before it can turn north without further deterioration.

Some also invented the U theory. Basically, it is like the “L” theory, except that it is the “U” shape.

However, the market condition seems to form a “I” form in the sense that it will get worse before it gets better. This raises an interesting question of how worse the market will end up with? It is an interesting question that many people are anxious of knowing, and here I will show a portion of my predictions. There is no clear picture that the GDP growth will go up, or even stable at current level. The unemployment is increasing due to the closeup of factories. The consumption is decreasing because of the uncertainty of the job security. More industries and more sectors will ask bailouts’ money because of the moral hazard. The Credit Default Swaps is great innovation in the bull market, however, is dangerous in the bear market.

The reasons can go on and on, but some arguments can be backed up by economic data, and a few cannot justified because of the market uncertainty and lack of transparency. Thus, a rational prediction of the S&P 500 will be reasonably reach about 500.

To verify any theories, empirical evidence are needed. There is one chart that illustrates the W or the L theory at graphics8 dot nytimes dot com slash images slash 2009 slash 03 slash 07slash business slash 07jobs-graf01 dot jpg

Further empirical data are from the following sources:

To be continued . . .

2 Comments

  1. investor

    March 9, 2009 @ 10:43 am

    1

    Warren Buffet just said today that the economy is off the cliff.

  2. investor

    April 27, 2009 @ 12:31 pm

    2

    Michael Mussa wrote “World Recession and Recovery: A V or an L?”
    at http://www.iie.com/publications/papers/mussa0409.pdf

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