The good news is that such a strong increase to date does not rule out further impressive gains. By 1934, the Dow had risen by almost double the percentage of today's boom, but continued to rise over the next three years. The same is true of the mid-1950s and the mid-1990s episodes. By contrast, 1936 and 1987 both gave way to heavy selling in the following 12 months. Overall, the fact that the market has already gone up so strongly is not a cause for concern in itself, though.
If the present bull market is to continue – both in the US and here – the wider investing public needs to get much more heavily involved. So far, it has been very much an insiders’ affair. The proprietary trading desks of the big investment banks and hedge funds have cashed in by taking advantage of the authorities' offer of next-to-free money in order to bet on equities.
As the markets have risen, traded volumes have generally stagnated or shrunk. This is a totally unprecedented occurrence. The normal pattern during a bull market is for the number of shares changing hands to rise alongside the index's gains. A narrowly-based bull market such as this is vulnerable in the longer term. The dramatic mini-bear market of April-July was a poignant warning about what can happen when an index sells off after rising strongly on thin volumes.
Of course, the public's lack of participation to date could actually turn out to be good for the market. There are huge amounts of money tied up in US bond funds. This betokens high risk aversion towards shares on the part of Joe Public, which in turn should mean higher returns on equities. And to some people, the cash also represents fire-power that could blast the markets higher.
There was a good reason why April was unlikely to have been the top of the bull market, which I pointed out at the time. Momentum – as represented by the weekly relative strength index – was making new highs alongside the market. In 14 of the last 15 bull markets, momentum has peaked in advance of the Dow. Subsequently, though, the Dow has made further fresh highs, unaccompanied by new highs in momentum.
Dow momentum
Admittedly, this 'momentum divergence' signal is not a timing device. There have been three cases where momentum peaked by three years or more ahead of the Dow itself. But there have also been five instances where a top in momentum was followed by a top in the market between 30 and 38 weeks later. Were this pattern to repeat itself, we might expect a top in the Dow to occur any time between mid-November 2010 and 7 January 2011.
For now, though, the bull market remains intact and it is to technical targets on the upside that we should be focusing. For the FTSE 100, the big objectives lie at 6048-6147, 6429 and 6814. In the case of the S&P 500, the figures are 1312, 1332, and 1383, and for the Dow 11779, 12000 and 12416. As well as being targets, these levels may well also act as barriers, if only in the short term.
Rising FTSE, falling volumes
Can gold also maintain its bull run of the last decade? The yellow metal's uptrend is in good shape and it would take an enormous sell-off to reverse this. As of 8 December 2010 with the price around $1,400, the price does look overstretched and vulnerable to a correction. Our view is that the best strategy remains to buy on pull-backs, with moves ending around the 34-week exponential moving average being particularly attractive entry points. The key targets for gold include $1,538, $2,009, $2,624 and $2,800.
Golden opportunity?
