Why Dow 20K may take longer than you think

http://finance.yahoo.com/blogs/talking-numbers/why-dow-20k-may-take-longer-than-you-think-225400184.html

he Dow Jones Industrial Average touched record highs on Monday and that has investors asking a simple – but big – question: How long before we see Dow 20k?

After a scary first half to October, the Dow rebounded and traded at 17,410.65 on Monday, its highest level ever.

So can the Dow hit 20,000, just 15.2 percent from Monday’s close, soon? After all, the Dow gained 26.5 percent in 2013.

One Talking Numbers contributor isn’t holding her breath. According to Gina Sanchez, founder of Chantico Global, the Dow will likely not move higher at last year’s breakneck speeds. If anything, she expects the index’s growth to be reined much as it has been this year; so far in 2014, the Dow is up just 4.7 percent.
Sanchez has a time horizon of about six years before the Dow reaches the 20,000 mark.

Since 2009, on an annualized basis, “the Dow has been compounding at a little over 12 percent,” said Sanchez, a CNBC contributor. That is above the nominal GDP growth plus its dividend yield for the index during that period. Since the Dow grew faster than nominal GDP plus dividend yields in the last five years, Sanchez expects it will slow down over the next several years so that the fundamentals will catch up to its valuations.

“If we’re compounding well above trend, that suggests that we’re going to have to compound well below trend in order for that to end up at about 6.5 percent, which is my expectation,” she said. “So if you start from 2009 and you compound at 6.5 percent, we get to 20k in 2020.”

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Like Sanchez, Mark Newton, chief technical analyst at Greywolf Execution Partners, believes it may be a while before the Dow sees 20,000.
(Watch: Art Cashin: Midterm elections next market catalyst)

“The market is fairly overbought here,” Newton said. “It’s as overbought as we’ve been since 2007. And now you’re seeing signs of momentum starting to wane a bit.”

Specifically, fewer stocks in the Dow are hitting their 52-week highs since the spring of last year, said Newton. “Half of the Dow stocks peaked prior to 2014 and another third of them actually peaked between January and July of this year,” he added. “You only have about a quarter of the stocks that recently made new highs as the Dow is making new highs. The combination of those things is pretty big problem for me.”

Instead, Newton’s chart shows the Dow may hit another big round number – to the downside. “I think even a pullback down to 15,000 to me is a lot more likely in the next 12 to 24 months than getting right away to 20,000,” he said.