Dow: elephant and non-elephant
As of Tuesday 29 May, the Dow Jones had risen 2.4 per cent from its lows of the middle of last week. Viewed on a weekly chart, it might look to the casual observer as if the index had formed a low and was in now in recovery mode. Comparing this to the start of previous rallies, however, reveals a distinct lack of elephantine properties. The big, sustained moves higher from last October and December, for example, got underway with one-day low-to-high gains of 3 and 4 per cent respectively.
No despondency on Wall Street
Other pachyderm qualities are also currently conspicuously absent right now, both from the US indices and those elsewhere. Significant lows in the stock market are generally accompanied by widespread pessimism, both among the investing public and among opinion-formers. The latest Investors Intelligence survey shows 39 per cent of American pundits are bulls and 24.5 per cent are bears – a gap in favour of the bulls of 14.5 points. OK, it’s hardly exuberant stuff, but it’s not gloomy either.
Each of the last three summers has played host to a correction of some sorts. In 2009, the mini sell-off ended with a gap of 0 between bulls and bears. In 2010 and 2011, the gap at the lows was minus 8.3 and minus 11.9 points respectively. Clearly then, bullish opinion has yet to be ground into the dust by a herd of pessimists.
FTSE's short of breadth
Market breadth is not doing what it should do in a genuine bullish stampede, either. A healthy rally is one in which as many as possible of the indices’ individual members participate. The McClellan Summation Index is one way of measuring market breadth. For the FTSE 100, the McClellan Summation Index has already reached the sort of low readings where previous recoveries have begun. However, it has not yet turned up in the decisive fashion that it ought to.
The safest conclusion, then, is that the move up from the lows of the middle of last week is not the start of a new uptrend, either in the US or on this side of the Atlantic. What it has served to do is get rid of the oversold daily momentum readings on some of the indices. On Friday 18 May, the FTSE 100, for example, had a relative strength index reading of just 25 per cent. By Tuesday 30 May, this had recovered to a not-far-from-neutral 42 per cent.
FTSE's bear targets
How far might a further decline take the indices? For the Dow, there is a strong cluster of targets centred on about 12150. For the FTSE, a drop to 5192 or 5100 is a big risk. Whether such a decline will prove to be the final low, I am not sure. The weakness could easily persist at least until Greece’s next attempt to form a government and stay in the euro, which is not until Sunday 17 June. I am only looking for short positions right now.
**Dominic will be presenting at the London Investor Seminar on 18 June - book your place today.**
