Aug 13, 2007 - Issue #071

Is the Bloodbath Over?

Dow score card for the week ending 8/10/07.

DJ-30: 13239.54 +57.63 +0.44%. The Real World DJ-30: 54.29 +0.23 +0.43%.

UP: 18, Down: 12.

Trends (weekly): This is the subjective part.

Rising 8 (n/c) 27%:

GE, +*GM, HPQ, +*KO, MMM, MRK, +*PG, UTX.

Consolidating 8 (-1) 27%:

-*BA, CAT, -*IBM, INTC, MCD, +*PFE, -*VZ, +*WMT.

Declining 14 (+1) 47%:


+/- denotes change of direction.

* denotes change of category.

Is the Bloodbath Over?

One of the guest experts appearing on CNBC's Kudlow & Company on Friday was heard to say the market has touched bottom.

I doubt it! There's probably more where that came from. There's been a lot of damage done. It usually takes time to bring the confidence level back.

Markets are a continous struggle between greed and fear. Of the two, fear is, by far, the most powerful (See Market Psychology and Contrary Opinion). We've seen greed push prices to record highs. Now we may see what happens when fear prevails. This past week was a good example.

Look at the Dow average. Up 57 points for the week. Now look at the individual components. If my analysis is correct, internally slightly weaker.

Review Inside the Dow. The Dow's divisor is adjusted periodically to theoretically reflect the reinvestment of dividends. The effect always reduces the divisor. What happens when we divide by a number less than 1? It becomes a multiplier!

In the past year and a half, the divisor has gone from .20 to .12. This means we've gone from a multiplier of 5 to a multiplier of 8! And everytime a dividend gets paid, the divisor gets ever lower, which is to say, the multiplier gets ever higher!

This means, currently, every 1 point move in a Dow component means an 8 point move in the Dow average. which, in turn, guarantees the Dow average will become, seemingly, ever more volatile.

At this rate, it is not unreasonable to visualize, in the not too far distant future, the Dow moving up or down 1,000 points a day being common place.

Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!

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