S&P buy signal
I've heard a couple of cynics decry the latest gains on the basis that few shares are changing hands. Volumes in New York have shrivelled as the Wall Street indices have squeezed higher. This is entirely normal for the time of year, however. Besides, volume-based analysis in cash equity markets has largely broken down in recent years. Contracting volumes no longer foretell price reversal as they once did.
FTSE's flat volume
The cynics are on firmer ground when it comes to the price action. The saw-toothed ascent does smack of a counter-trend move. But while it makes trading more difficult, I don't think it adds up to a case for out-and-out bearishness. Admittedly, further hesitation becomes ever more likely as the bull market highs approach. I would obviously prefer it if the markets were powering towards these levels.
2007 all over again?
If you are hell bent on being bearish, I suppose there are vague similarities on the charts between today's situation and that of mid- to late-2007, when the credit crunch first struck. Back then, the Dow suffered a 10 per cent dip from its bull market highs, and then rallied above those highs before entering a vicious bear market. You might also point out that today bull market - as in 2007 - is getting long in the tooth, having begun 40 months ago.
According to my calculations, the median bull market in the Dow Jones since 1900 has lasted 32.9 months. Bull markets can be substantially longer than that, of course. In the 1990s, there was a 111-month bull market. But the benign economic and financial conditions that produced that upswing are hardly relevant today. I believe today's expansion to be a cyclical bull market within a long-term bear market. The median length of such expansions is shorter at 24 months. Either way, today's bull market is mature.
Diverging Dow
The same message emerges from my favourite longer-term barometer of momentum. While the Dow made a new high in May 2012, its weekly relative strength index (RSI) peaked back in February 2011. This situation - where the market makes a new high but its momentum indicators do not - is called 'negative divergence' and it has preceded almost every major market top since 1900. Typically, momentum peaks just over a year before the market does.
While negative divergence is useful for warning of a possible top, it is not a precise timing indicator. Besides, I don't think it pays to obsess over the issue of when the next major turn in the markets will occur. Top-calling and bottom-picking are the domain of the wannabe guru, not of the humble trend-follower. There are various services out there that seem to devote themselves to forecasting a massive reversal virtually every week. They're a recipe for missing opportunities and possibly incurring big losses, as far as I'm concerned. For now, the trend remains upwards and I am looking for longs.
■ I am away from Thursday 9 to Monday 20 August inclusive, during which time there will be no daily updates. This column will appear next week as normal, however.
