Echo From the Past

The Dow Jones Industrial Average could soon be repeating a pattern from the 1960’s.

The action of the Dow Jones Industrial Average during the week of 11/27/23 to 12/01/23 was like the second stage of a rocket igniting.

The daily Dow Jones Industrial Average chart  courtesy of  BigCharts.com (DJIA) shows what happened.

After an already spectacular rise from the 10/27/23 bottom the DJIA continued to accelerate.  In the process it became the first of the three main U.S. stock indices to exceed its August 2022 peak.  The daily RSI has gone above 80% which is the highest reading in more than a year.  Most of the time stock indices will make an important top with at least one RSI bearish divergence.  The so far non divergent RSI implies higher DJIA prices. Slow Stochastic has been trending sideways in the overbought zone; this phenomenon could continue for at least several days. 

Trading View weekly chart of the Dow Jones Industrial Average – their symbol (DJI) illustrates an important upside target could soon be reached.

On 12/01/23 the DJI was only 1.9% from its all-time high of 36,952.65 made on 01/05/22.  There’s a very good chance this peak could be reached or exceeded in the next few trading days.  Assuming a near-term peak is marginally below or above the January 2022 high, there’s a possibility a multi-year DJI double top could be forming. 

Has there ever been a DJI multi-year double top?  The weekly DJI chart from 1965 to 1976 answers the question.

The last time the U.S. experience accelerated inflation rates was roughly from about 1966 to 1980.  The accelerated inflation was not constant, there were pauses but it returned several times.  The high inflation rates were triggered in the 1960’s by the U.S. Federal Governments increase spending on social programs and the Viet Nam war.  The inflation caused bonds to decline and interest rates to rise.  Rising interest rates in risk free investments drew money away from the stock market, which contributed to stock declines.

The DJI was able to shrug off the early inflation from 1966 to 1968 and formed a double top.  Perhaps the same phenomenon is happening late 2023/early 2024?

Note the similarities with the DJI 1966 bear market with the 2022 bear market.  From January to February 1966 the DJI formed a narrow multi–week top.  The first peak was on 01/19/66 at 1,000.55 the final peak was on 02/09/66 at 1,001.11.  The bear market bottom was on 10/10/66.  In 2022 the DJI top was on 01/05/22 and the bottom came on 10/13/22.  The DJI percentage decline in 1966 was 26.4%, the 2022 decline was 22.35%.  January to October declines for both years are close.

There are also economic similarities with the late 1960’s.  The current accelerated inflation was triggered by the Federal Governments spending on the Covid pandemic.  The U.S. is not at war but is funding one war effort and there’s a high probability of soon funding for a second war effort.  How is the U.S. Federal Government going to pay for these war efforts?  They are already deficit spending and there are no plans to raise taxes. 

The only solution is to issue more Treasury debt instruments, which means more supply.  If demand does not increase, bond prices will likely fall, and interest rates are likely to rise. 

Since October U.S. interest rates have been declining which corresponds with the manic move up in U.S. stocks.  The situation could soon reverse. The Dow Jones Industrial Average may be repeating what happened in December 1968.