Diehard DAX
My stance in recent weeks has paid off nicely. My recommended position trade in Germany's DAX is some 700 points to the good as I write this, while my FTSE trade is up around 300 points or so. Personally, I don't see how I could have called it any other way. As a trend-follower in a strong uptrend, I go long. But there is no shortage of commentators whose advice has been the opposite, so perhaps I do have my uses.
S&P: Then & Now
For me, though, the real test will come when the trend reverses. It is all well and good making money when the market is rampant. In a strong enough wind, even turkeys fly. The trick is to hang on to profits when the market goes into reverse, or, worse still, enters a sideways phase. Given the indices' rampancy of late, I thought I would look again at the similarities between today and the mother of all trend reversal years, 1987.
As I discussed back in March, there are quite a few likenesses between the run-up to the Great Crash of 1987 and the present. In each case, stocks had performed strongly over the four years beforehand, and had entered the year with a bang. The S&P 500 sports the same sort of forecast earnings multiple and monthly relative strength index reading today as it did 26 years ago. The gains have been almost identical in scope as of 20 May 2013 as they were on the equivalent trading session in 1987.
The Mega-Top of 1987
In some ways, the indices' charge today is even more relentless than its predecessor. The S&P has not had a down month so far in 2013. In 1987, it at least stopped for breath between March and May before defying seasonality by rallying through June to August. By the time it topped out, the index's monthly RSI was 80.5 per cent, which was also the reading around the significant highs of 1998 and 2007.
I stand by my comments from March that the longer today's rally extends, the more painful the subsequent retrenchment will be. In many ways, the mid-1980s' bull run was much more rational than today. There was no financial crisis, economic growth was robust and monetary policies weren't excessively loose. Today, the market is going as a result of cheap money. I wouldn't shy away from calling it an early-stage bubble.
As a short-term speculator, I see nothing wrong with going with the flow even if it is a bubble. I always trade with a stop-loss placed a couple of percentage points away at most, so I feel reasonably insulated should disaster strike. Applying the rules that I follow today to the autumn of 1987, I believe that I would have at least been sidelined, if not short, before the cataclysmic sell-off arrived.
FTSE heads for its highs
Focusing on notional crash set-ups, though, rather than reality, is the mistake of too many trading gurus. I'll leave you, therefore, with my next bullish targets for the Nasdaq 100 at 3145 and at 6951 on the FTSE 100.
