Dow 20,000 and 5000 – which one first?
Sam Adelton
Feb. 18, 2007

Some gloom and doom theorists say Dow will reach 5,000 and even fall below that. Some heaven seekers believe Dow will go straight to 20,000. The million-dollar question is which one will happen first?

The fundamentals will dictate the real outcome. The charts and analytics will provide some early indications. Let us analyze which one is most probable here.

No matter what Fed says, one thing is for certain. The economy is underemployed but fully employed. People have lots of low paying jobs that are forcing them to go and borrow to maintain their standards of living.

The economy is definitely under deflation. The manifestation of deflation is evident in the corporation’s pricing inability and continuous lay off from time to time.

People losing their jobs have lived on their severance packages, 401(K) and finally borrowed against their home equity. They have started their own business to make sure their future is not affected. Small businesses need nurturing before it can bloom.

There are sector specific hyperinflations but the rest of the economy is under deflation.

Something interesting has happened to the stock market. It is acting like the bond market. The VIX volatility index is low. The dividend paying stocks are outperforming the growth stocks. The new dividend tax law has created this massive dilemma for stocks. The market knows very well the fact of deflation. That is why Nasdaq is stuck below 2400 and Dow is making new highs.

Again the question is which one will happen first Dow 20,000 or Dow 5,000? The answer lies in the extent of disinflation or deflation. If all the price depression is restricted to just disinflation or very low inflation, stocks will go to 20,000 first. On the other hand if real estate collapses, dollar crashes, long rates go higher because of Asian central bank redemptions, Dow will to 5,000 first.

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