Extraordinary how Halloween has taken off in Britain – or maybe just in the south-east – with themed parties, extravagant make-up, fantastic costumes and (usually) copious drinking. Or maybe, as a younger colleague of mine noted, it’s just an excuse for fancy dress. Yes, I think most of us enjoy a dressing-up box and a bit of theatre. This weekend I’m looking forward to bonfire night as I prefer its informality and the mix of adults and children.
The reason I’m thinking of fireworks, nasty surprises and disappointing results is that I’m rather worried about equity indices. Whether you look at charts or not, I think we would all agree that the bulk of global indices have seen some spectacular rallies since 2009, admittedly after catastrophic falls in 2008. Not only are these now long in the tooth, but the angle of ascent for many has been among the steepest in years.
Because the scale, size and scope of a countertrend move is usually proportional to the impulsive move coming before it, this means that a (damp) squib, originally a cylindrical firework that works best when dry, can only happen among indices that have been laggards.
Among developed markets the US’s Nasdaq has probably done best, doubling and then doubling again between 2009 and 2014, adding another 50 per cent since then. Progress over the past three years has slowed significantly and price action has been contained in smaller daily ranges. Historical data for the S&P 500 index since 1928 shows that when the market falls, it does so by 0.75 per cent on average a day; this year the biggest drop has been 0.2 per cent.
The more broadly based Russell 2000 index of smaller companies has doubled and doubled again since 2009, suffering bigger drawdowns in 2011 and 2015-2016 than its technology-heavy cousin. Progress this year has been muted and October’s daily candles have suffered small, but slightly scary, slips. These suggest that a drop back inside the old trend channel is a possibility, and appropriate tactics employed. There is no point buying and just hoping.
An index you may be unfamiliar with is the Dow Jones Utilities Average. Starting at a base of 50 in January 1929, it consists of the top 15 utility companies quoted on the New York Stock Exchange. Today these are mainly energy companies and are favoured for being defensive choices with regular dividends; you might want to think of these as an alternative to corporate bonds. Therefore, they suffered far less in 2008 and have held in a neat channel of about 45 degrees since 2009, the grudging move adding 116 per cent. Today we are once again pushing up at record highs and looking adequately supported.
Sticking with our US theme, the Dow Jones Transportation Average, established in 1896 as the DJ Railroad Average, also doubled and doubled again from 2009 to 2014. It has struggled since, with quite a hit in 2015. Recent price action takes the shape of a small rounded top, suggesting bullish momentum is seeping out of this stale balloon.
When markets don’t sing from the same hymn sheet, life gets tricky. Gut instinct tells me that these are tired old bull markets and due a correction – where it pays to adopt a defensive stance.
