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OPINION

Sell signal looms

Sell signal looms
November 7, 2012
Sell signal looms

I do understand why he's asking this. After all, I have been fairly insistent lately in my view that Wall Street, the FTSE and the DAX would all record further gains before too long. At the same time, the US indices have continued the shakeout that has effectively been in progress since mid-September. A particular aggressive day of selling occurred on Friday 2 November, with the S&P shedding some 1.5 per cent from high to low.

 

S&P: shakeout not meltdown

First of all, I reiterate that there is little justification for the bears to get excited here. As of the highs of Tuesday 6 November, the S&P was a grand total of 2.8 per cent below its bull market highs of 1475, registered seven trading weeks earlier. Our own FTSE 100 was 0.8 per cent below its annual highs on the same basis. Hardly a financial holocaust, is it?

 

FTSE not topping

 

To address Martin's only half-joking accusation, I do not think that my stance really qualifies as perma-bullishness. I fully accept that, as a short-term speculator, one cannot become wedded to any particular view of the markets for that long. A long-term investor can sometimes get away with remaining perma-bullish, as the passage of time might eventually prove him correct. But I am more than happy to seek short positions, as I have made clear in my recent daily Outlook pieces: http://bit.ly/DPicarda

As John Maynard Keynes once said: "When the facts change, I change my mind." The fact that would do most to turn me bearish would be a Dow-theory sell signal. Dow Theory involves comparing the movements, of the Dow Industrials, Dow Transport, and, in the version to which I subscribe, the S&P 500. The theory is a close cousin of the swing-chart methodology advocated in this column. But whereas the swing charts are really for catching moves of a few days in the markets, Dow Theory is about calling the longer-term trends.

 

Dow's messages

Wall Street is now in what would be called a 'secondary reaction' against the primary trend, which remains upwards for now. A secondary reaction is a move that runs counter to the main in the market and typically lasts for a few days to a few weeks. With the Dow Transports recently having bounced by more than 3 per cent from its secondary-reaction lows, a sell-signal would occur if either the Industrials or the Transports and the S&P now breach their recent closing lows.

 

Almost a sell signal

This is actually very close to happening. The relevant prices are 13077.3 for the Industrials, 4892.6 for the Transports and 1408.8 for the S&P. As of early afternoon trade on Wednesday 7 November, the Industrials have made an intraday low of 12991, and the S&P is down to 1401.2. Failing a decent recovery by the close of business tonight, therefore, we will have a Dow-theory sell signal. If it happens, I'll discuss its implications next week.