August 13, 2016

No Support in the Stock Market

Jon Galane
6 min

Many investors feel that sinking feeling in the pit of their stomach as they look at their 401(k) and IRA statements. Since an all time high of 14,164 on October 9, 2007, the Dow Jones Industrial Average has steadily gone down. On October 19, 2007 support levels in the market began to decay creating a demarcation day as the market began its steady decline, a day I will call the first Black Friday of the 21st century. The market is now quickly approaching a 20% drop from this date.

It’s easy to understand investor angst. On July 2, 2008 the Dow Jones Industrial Average closed at 11,215. The news of the day included GM, Ford, and Toyota in a -sales slump on falling demand. GM tumbled to the lowest levels since 1954 after a Merrill Lynch analyst suggested bankruptcy. The average price of regular gas had just gone up to $4.09, oil was at an all time high, closing at $143.57; and Starbucks announced the closure of 600 stores, cutting 12,000 jobs. On July 2, 2008 the market officially began being called a bear market.

Do investors really believe that their stock portfolio has the opportunity to go up in the near future?  There are two levels that determine the direction the market will go as a path of least resistance. Support levels; this is the lowest point level the market has moved on the bottom side over a period of time. Higher support levels indicate a bull market; decreasing support levels indicate a bear market. Resistance levels; this is the level that stocks resist going above and if the stock or index breaks through a resistance level it will probably move further in that direction.

As I was studying the market this past week I saw a very disturbing trend. On March 12, 2007, the Dow had its highest support level of 12,318. The market then jumped up on August 15, 2007 followed by 5 consecutive support level drops. Further, the Dow is below its highest low (support) of March 2007. The next support level is 10,816 made on June 14, 2006. If the Dow breaks this support level the next support is at 9,757 made on October 22, 2004. Notice all of the repetitive October support dates.

On the resistance side we have seen a decreasing resistance level in the Dow since October 8, 2007. We are coming up on a year of decreasing resistance in the Dow. The last date of a truly long-term resistance breakthrough was December 28, 2004 with a level of 10,854, which we are quickly approaching. A downward breakthrough of this resistance level will signal a sell-off to at least the next support of 9,757.

When I was a practicing investment advisor, people would rationalize by saying the market always comes back. Beware of the current economic and political scenarios. This article will not go into the various scenarios, just know there are many economic difficulties we face on top of a political election involving energy, taxes, and new government program spending in the $250-300 billion range.

Yes, the market goes up, but at what rate versus alternative investments such as real estate, oil, or gold. I see an uncanny relationship between current day and 1973-1978. On January 1, 1973 the Dow was 850. On December 31, 1978 it was 838, down -1.4%. Do you feel comfortable losing money over the next five years with what may turn out to be the highest double-digit inflation in the history of our country? Or would you like an investment you control, receiving income and growth through what you know best?

You can’t control what the new president and congress may do to increase your taxes, spend your money, or make energy decisions. Do you feel comfortable with losses after inflation that could end up being a real rate of return of -20% to -40% a year over the next five years? Have you ever invested in real estate, trust deeds, or other alternative investments that have lost 20-40% a year over 5 years? At a 15% inflation rate, including oil and food, and a -5% drop in the market you could feasibly lose 100% of your portfolio in 5 years. Do you really want your future to depend on the market coming back?

You can control your investments in what you know best, where you know how to make money. Take advantage of the opportunity to invest with a self-directed retirement plan and you will be able to get rid of that sinking feeling of doom you may be feeling in the current economic climate.

Jon A. Galane is principal and CEO of Mountain West IRA. Mountain West IRA has just opened its Utah office in Salt Lake City, Utah.

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