DAX gaps again
Flakier FTSE
Despite staying bullish overall, I have some misgivings about the very near outlook. The Federal Reserve is widely thought to be about to rein back its money-printing and bond-buying spree this week. Cheap money has been the lifeblood of the mighty uptrend in equities since 2009. We know all too well from the gut-wrenching drops of summer 2010 and 2011 what happens when this flow gets cut off.
When QE runs out
Overbought S&P
This time, the Fed is not about to make the same mistake of ending its support in one go. Instead, it is going to try and wean the markets off slowly. This needn't lead to another violent shakeout, although the markets are in some ways more vulnerable. The S&P 500 is overbought on its monthly chart, which it was not in 2010 or 2011. It is also even more overvalued on a long-term fundamental view.
I did shudder a little bit this week when I saw the latest cover of Time magazine. The headline was 'How Wall Street Won', along with a picture of a grinning bull replete with sunglasses and party-hat. Admittedly, the secondary line struck a note of caution, raising the question of whether it could end in disaster again. But it's the tone of front covers that counts and the lessons of history aren't reassuring.
In 1999, Time named Amazon's founder Jeff Bezos as its Man of the Year. A few months later, Amazon's stock crashed along with the rest of the tech sector. Its 'Dawn of a New Dynasty' cover in January 2007 heralded a decline in Chinese stocks of 73 per cent. The mother of them all, of course, was Business Week's 1979 cover lamenting 'The Death of Equities'. At the time, Wall Street was only 24 per cent away from an inflation-adjusted low that would give way to the biggest boom in memory.
While I tend to think of magazine covers as anecdotal warnings of reversals in the markets, some treat it as a science. Based on his study of cover trends, Paul Macrae Montgomery - author of the Universal Economics newsletter - was quoted in Barron's this week as saying that there's an 80 per cent chance that Wall Street will top in a month and will be lower than today in a year's time.
I am not saying that it isn't possible to call turns in the market. I know a couple of traders who seem to do it regularly and very profitably. For my part, I am no good at it. The day I stopped trying to pick the next big top or bottom was more or less the day I stopped bleeding money. As such, I will mark Time's latest cover down as another potential reason for caution, rather than a predictor of an imminent peak.
Going in to the Fed's announcement, I am doing as little as I possibly can. This is not an original approach, going by the generally stagnant conditions in the indices as of the morning of Wednesday 18 September. Wild swings will likely accompany the big decision, which will knock out perfectly good positions in the process. Once the dust settles, my hope is that the S&P can resume its climb to 1800 and the FTSE to 7000.
