Investing

Is 15,076 the Most Bearish Case for DJIA in 2016? Apple, Boeing, Cisco, Intel, Nike, Microsoft

The Dow Jones Industrial Average (DJIA) lost 2.2% in 2015 to close at 17,425.03 at the end of the year. Investors should take note that this was the first losing year since 2008. Then they should consider the all-time DJIA high of from 2015 was 18,351.40, up a whopping 183% or so from the Great Recession’s V-bottom low of 6,469.95 in 2009. Does this mean that the bull market has been interrupted or does it mean that the bull is dead?

24/7 Wall St. has been projecting the bull and bear case for the Dow and its 30 components for years now. This worked rather well during the first five years of the bull market, but the methodology for the peak-Dow versus reality ended up about 800 points in the wrong direction compared with the 19,142 DJIA target for 2015. What this means is that the analysts were simply too aggressive in each of the 30 Dow stock price targets. Amazingly, the same methodology at the end of 2015 would have been even more optimistic for 2016 — to DJIA at 19,700!

It is easy and has been easy to get caught up in the bull market fever. In fact, investors and analysts who predict losses (particularly short sellers) are generally hated by the public. The first consideration here that seems obvious, particularly in light of the first week’s record-breaking DJIA losses for any year, is quite simply that the analysts are hanging on to the bull’s horns too much: Analysts are still just too damned optimistic!

Again, 24/7 Wall St. just does not see the huge upside case for 2016 being all that realistic. That level of 19,700 was of course theoretical via a methodology, so we wanted to run the inverse of this by assuming the most negative analyst price target on each of the 30 Dow stocks from Thomson Reuters and then seeing what the overall average Dow stock’s downside might look like. In this case, the average Dow stock could fall by a whopping 13.48% in 2016 — and an averaging of the losses using the same methodology would point to DJIA at 15,076 in 2016, if you don’t consider the dividends.

If the notion that 15,076 is too low, we then took out the three outliers of the most negative analyst calls. This turned out to be an average downside of 10.73% for the other 27 Dow stocks, generating a downside of 15,555 for 2016. Again, these are using the worst downside target on each of the 30 Dow stocks (or 27 in that case) from analysts and saying that the average would apply evenly.

Using the average downside is not really how the Dow works because it is a price-weighted index. That is old-school as is, but admitting that not even the consensus crowd will be right universally on 30 stocks means that the average acts without trying to pick the real winner or loser stocks as outliers. Keeping the dividends out of the total return also keeps the numbers perhaps more bearish than they might otherwise be. The average Dow stock dividend was about 2.8% at the end of 2015, and the average yield from the 2016 Dogs of the Dow had an average yield of 3.85% at the end of 2015.

Would the DJIA at 15,076 or even 15,555 in 2016 really be atrocious? It sounds bad when you consider that the 2015 all-time was 18,351.40, at least on the surface. The 15,076 would imply a drop of about 17.85% from the peak, and the 15,555 DJIA minus the outliers would represent a drop of about 15.2% from the peak. Now consider that neither one of these are even in the classic bear market for a formal 20% drop.

The Dow’s low for the first seven trading sessions of 2016 was 16,232.03, and the Dow challenged 16,100 during the second week of January. This just keeps it hard to be so bullish that a Dow 19,700 seems even remotely realistic. Still, using the average of the most negative analyst targets in the Thomson Reuters universe might give the value and sideline investors some confidence. After all, even though the Dow and S&P 500 both hit 10% corrections last week, investors have bought literally every single dip and correction for over four years now.

Another consideration here is that three of the most negative analyst targets of the 30 Dow stocks still call for positive gains. Also, the most negative Apple Inc. (NASDAQ: AAPL) analyst price target was only about 3.1% lower than the $105.26 close of 2015, and Apple even breached under $100 in the first few days of 2016. Most investors and analysts still view Apple as a cheap stock with far more upside. That could be misguided and the same mistake as was made in 2000, but that’s how the world view is today.

This is also the outright negativity in the other top tech stocks in the Dow: Cisco Systems Inc. (NASDAQ: CSCO) still has the worst analyst target, down at $17.00, while Intel Corp. (NASDAQ: INTC) has a most negative analyst target of $24.00 and Microsoft Corp. (NASDAQ: MSFT) has a most negative analyst target of $39.00. Those targets are so negative that it would imply Cisco cannot sell any new products outside of the United States, that Intel’s PC business actually disappears or that Satya Nadella’s plan for Microsoft would eat up business revenues. Anything is possible, but again these are the most negative of the negative targets.

24/7 Wall St. has decided to look at the Dow stocks with the greatest projected downside from the end of 2015 to the most bearish analyst price target from Thomson Reuters. Some of these seem extreme, or overly extreme, and it is possible that they are old holdover calls from the past that have not been updated. If these downside targets are not hit in 2016, perhaps the negativity has become overstretched.