S&P's fresh peak
I came across a decent summary of some of the former in the blog of Richard Jennings this week (bit.ly/15HEIbL). "Are we forming a market top? It is very possible. We saw the same sort of action towards the last two market peaks," he points out. Richard highlights how the S&P is following a very similar price trajectory as it did in 2007, that is very dear in fundamental terms, and that investors are betting heavily using borrowed money.
I have no issue whatsoever with any of those arguments, or with the notion that the current uptrend will come to a very sticky end. There is, of course, something very troubling about a booming stock market against the backdrop of a pretty dodgy economic recovery. But one could have said all this at any time during the past couple of years. I see no particular reason why a top should form here.
Transports rev up
By contrast, I can think of one very good reason why the bull market should keep going. With the Dow Transportation Average having joined the Dow Industrials and S&P 500 at new highs, a Dow Theory buy signal has occurred. The average gain after previous signals has been 4.5 and 11.7 per cent over three and six-month periods, respectively, according to the research of its greatest exponent (www.thedowtheory.com).
Graham Cox has emailed me to ask why I was telling people to go long of the FTSE 100 and of the sterling/US dollar rate at the same time in my Daily Outlook report on our website. "It is unlikely that the FTSE will rise when cable (sterling/dollar) and especially the pound overall is rising, as now," he writes. He also sent me a chart of the two overlaid, which does appear to show that the two have gone the other way during 2013.
GBPUSD and FTSE of late
First of all, Graham is right to be watching the relationship between currencies and stocks. Exchange rate movements - and, indeed, commodity fluctuations - can impact what happens in equities. A rising dollar can mean that investors are fearful and likely to dump risky assets, like UK stocks, for example. But these relationships also shift over time. The pound and stocks have often risen strongly together, as in early 2009.
GBPUSD and FTSE over time
A closer look at the data suggests that there's no reason not to be long of the FTSE on days when the pound/dollar rate is rising. Since 1986, the index has gone up on 48.9 per cent of days when sterling has strengthened against the US currency. The relationship hasn't been much different in 2013, either. Since the start of the year, the FTSE has advanced on 34 of the 73 days that GBP/USD has done the same, or 46.6 per cent of the time.
I am sure one could find some very convincing reasons for these shifts over time. As a technician, though, I am not overly bothered. If two markets are both in nice uptrends on their intraday charts, I am content to buy into both, which is what I intend to keep doing for now.
