Early last week a reader wrote in suggesting he, and probably many others, would like me to write a column comparing the relative performance of US indices. This Monday another wrote in suggesting the Dow Jones Industrial Average was possibly ending the secular bull run since 1994, tying in with the end of a Kondratieff economic cycle. Gentlemen, you know who you are and I thank you for your suggestions. Keep them coming!
Regular followers will know that as well as this weekly column for the Investors Chronicle I also write a daily email, covering six key markets. The S&P 500 index is among them, so I’ll start there, hoping not to repeat myself. The bull market that started in 1982 had two very serious setbacks starting in 2000 and 2007 when the index halved in value; this is what I’d call a very big hit to the wallet. This year’s grinding rally and recent slump, ahead of the psychological 3,000 level, trimmed gains from 10 per cent to 3 per cent; a shame, and coming towards the end of the calendar year chances of recovering from the sell-off are slim. A decisive break below 2700 would hint that a second big wave lower comes next.
Current observed volatility in the Dow Jones Industrial Average is running at the ultra long-term mean. Average traded volume has increased significantly since 2017, and in February was the highest since March 2009 – a worrying combination suggesting many are quick to pull the trigger as they are uncomfortable with current valuations. Ridiculously overbought for months on end, this October’s slide from a record high shaved 8 per cent off this year’s gains so that, at the time of writing, we’re up a mere 2 per cent on the year. An irregular potential double top in the 26,666 area hints at a possible retreat towards 23,000.
As so often is the case, the higher they climb the harder they fall, which is what happened to the Nasdaq, which in August was up 20 per cent this year, halving those gains so far this month. A clear double top at 7,700 is in place, with monthly candles forming a potential evening star (three-candle combination) and/or a possible bearish engulfing candle in October. The drop has put us back inside the trend channel since 2016 with decent support in the 6,700 area.
The Russell 2000 index of the smallest shares in the Russell 3000 index, with a popular exchange traded fund (ETF) and mini-futures contract associated with it, peaked at a record high in August and has fallen steadily since then and we’re now flat for the year. Back in the middle of the trend channel that has dominated since 2009, we would allow for a deeper pullback to its lower edge and Fibonacci retracement support around 1,450. Then watch carefully how it reacts and whether the 50- and 200-day moving averages cross to bearish.
I realise a lot of my views will be unwelcome, and you will ask (correctly) why this should happen when there are so few investment alternatives out there. Traders call this the ‘TINA’ trade – There is No Alternative. True, but that also doesn’t mean ploughing in, unthinking, into dangerous waters; nor does it mean complacently repeating the mantra that in the long-term stocks offer better returns.
