Dow's new record peak
Before long, I expect the S&P 500 to follow in the Dow's footsteps. A break to new highs by the S&P will be even more bullish in my view, as it is a much more widely-followed index. The all-time high to date is 1576.09, and was achieved in October 2007. Prior to that, the S&P peaked at 1552.82 in March 2000. After each of those peaks, it went on to lose half of its value.
S&P scales the heights
Given its two previous major reversals in this region, there are more than a few pundits who are predicting that another top is in store very soon. I find that hard to envisage for now. Neither the S&P nor the Dow is at extremely or even modestly overbought levels on its monthly chart. Monetary conditions are benign. I am gunning for further fresh highs in both indices, therefore.
Not overbought Dow
Speaking of the very big picture, I have just recorded a fantastic video interview with a leading expert on financial market cycles. Based on the patterns of the past, Kerry Balenthiran thinks that the long-term bear market that began in 2000 has further to run. (If you want to hear Kerry's very precise prediction, you can to watch it here: bit.ly/YXMPh4). He reckons we'll see another small bear market this year and then further big swings before the next long-term bull cycle begins.
I have no problem with the notion that the US markets are in for further turbulence over the coming years. And I definitely agree with Kerry when he says that that the lows of this bear cycle are already in. I don't think for a moment we'll see the S&P below its 2009 trough of 666. This wasn't always my view, though. During the darkest days of 2008 and 2009, I predicted we'd see a deflationary collapse that would drag the markets down even lower, with the FTSE dropping below 3000.
The FTSE's lows are well in
I am not embarrassed to have expressed those views back then. There is no shame in being totally wrong from time to time. What is shameful is holding on to an opinion long after it has become plain that you are wrong. I turned bullish once I grasped that the central banks' money-printing programmes were truly a game-changer. Despite the experience of the last four years, though, there are still quite a few commentators out there who are calling for a deflationary meltdown, involving a drop of 75 per cent or more in the S&P.
The sort of turbulence we are in for will not involve deflation, in my view, but inflation. Further asset-price bubbles will be the first manifestation of this, while eventually stubborn generalised price rises will set in. Bondholders are in for the worst of it, but I don't think life will be a picnic for equity investors, either. If there's a silver lining for us short-term speculators, it's that we're better-placed to make money in these conditions than buy-and-hold investors. For now, I continue to seek long positions in the S&P and FTSE.
