New highs for Nasdaq
Of course, while the indices registered new intraday highs, they did close lower. Immediately, there was rush to talk about a top. "They generally don't ring a bell [at the highs], but yesterday sounded like a gong," wrote @mercenaryjack on Twitter. "Is the US stock market making a top for the year? Call me maybe!" quipped Doug Kass (www.seabreezepartners.net).
The bear case at this point can sound seductive. The US indices are in perfect territory to make a bearish double-top - or a head-and-shoulders pattern, in the case of the FTSE. Volumes are paltry, denoting a lack of conviction behind the latest move. The bearish month of September is just around the corner. And there are signs of complacency creeping in, based on various measures of sentiment.
No fear: the VIX today
Take the VIX, for example. The CBOE's so-called 'fear index' - which measures the implied volatility of S&P options - dipped the other to a blissfully serene reading of 13.45. The last time traders saw so little turbulence ahead over the next 30 days was in June 2007 - as the last bull market was peaking and the credit crunch was about to strike. Lows in the VIX have preceded significant pull-backs in each of the last three years.
My fellow tipsters are also getting a little rose-tinted in their outlook. According to this week's Investors Intelligence survey of US advisors, there are more bullish newsletter writers out there than at any time since April. More than 47 per cent are in the optimistic camp, with just under a quarter pessimistic. The gap between them of 22.6 per cent is elevated, but not yet problematic. Readings often reach as high as 30 per cent before trouble occurs.
Insofar as I have any sympathy for the bears, it is more on fundamental, than on technical grounds. The previous significant rallies since March 2009 have been underwritten by central banks, being the result of major injections of liquidity. Today's is based on anticipation thereof. The cheque is in the post, so to speak, whereas before, it had both arrived and had been deposited.
FTSE head-and-shoulders
I was intrigued by a tweet this week by David Schwartz (@schwartztrends), saying that head-and-shoulders patterns were not good for predicting tops in the broad equity indices. I imagine David is likely talking about the FTSE 100, which could be tracing out such a formation. A quick eye-balling of the S&P 500's experience since 1928 suggests he is probably right. I could count only one significant top that took the form of a discernible head-and-shoulders.
DAX's next target
As of Wednesday 22 August, I see no reason to change my existing stance on the main stock market indices, therefore. I think they will press higher still. With the exception of the Nasdaq 100, none of the indices I cover have even yet notched up a daily overbought reading. The S&P is well poised to press on to 1440, with the DAX and FTSE lining up for 7194 and 5943 respectively. And, even if they now correct, I would see renewed further upside thereafter.
