We're still in that same mode, where Psychology has weakened as the market rally has ensued. That is a very natural occurence, since we're essentially measuring the "Wall of Worry." So just like last week, here's where our Asset Allocation Model stands this morning.
Source: HaysAdvisory.com. Date: 1/17/2012
At the bottom of the correction back in the summer/fall of last year, we were receiving the maximum bullish message from our Asset Allocation Model of P1, M1 and V1. Based on our historical studies, the combination of these levels, in our opinion, suggested a potential range of 13.9% to 68.6% on the S&P 500 over the next 12 months, with an historical average of 35.1%. However, now that Psychology has deteriorated to P4, the combination of these levels, in our opinion, is suggesting a potential range of -4.5% to 54.4% over the next 12 months, with an historical average of 16.7%. This could put the S&P 500 somewhere between the low 1200s to the high 1900s over the next 12 months, and if you applied those percentages to the Dow Jones Industrial Average, the range could be between the high 11,000s and the low 19,000s. Furthermore, if you apply the average historical return to Friday's close on the S&P 500 and the Dow Jones Industrial average, in our opinion, you might see levels of 1504 and 14,497, respectively, over the next 12 months.
So with that scientific evaluation, let's expand this to the "Ouija" board. No, not that Ouija board, but the one that we chart-watchers use. Take a look at this interesting chart of the Dow Jones Industrial Average.
Click on the image above to view a larger chart.
You do see that very interesting pattern of the Dow for these last 35 years. It shows all the ups and downs that at the time seemed so dramatic, but when you put many of them, like 1987, in historical context, you see that they were just bumps in the long-term positive trend. But 1998 put a stop to that, and now we've been in this wild oscillation for 14 years. The Dow is certainly stronger than most indices now, and very close to erasing the correction of last year, but it is still in that nerve-wracking chart pattern of higher highs and lower lows. We'll certainly have to consider that as we see the next higher high.
The key point I'm making here, with our Asset Allocation Model still so positive, is that the next higher high could project a target of 16,000 in the next one year. This sounds so optimistic that I'm sure you are having a good laugh now, but history has spoken, and with an historical potential of somewhere between 11,839 and 19,140, that target, in our opinion, is certainly in the ball park.
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