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Bullish charts for a perma-bear

Casts her net far and wide to find some properly positive charts
July 18, 2019

Regular readers may often find my attitude to stock market indices irritating, depressing or plain wrong. There are several reasons why I’m likely to be more bearish than most. First and foremost, I am not, and have never been, a stockbroker. This industry has a vested interest in being upbeat, bullish, and suggesting that the best returns are to be had by buying shares. No comment.

I’m also dead against the creation of hundreds of indices with which fund managers benchmark their performance. Most just add another layer of complexity and help obfuscate absolute returns. Similarly, exchange traded funds (ETFs) are cheap and cheerful, but I often ask myself ‘how exactly are providers hedging the exposures they take on?’

Another reason I may be prone to a negative equity bias is that as a market maker, with dual capacity in banking dealing rooms, one sees the flow and is the counterparty to retail demand. This was something the amazing Jesse Livermore discovered early on in his speculative career. (If you haven’t read Reminiscences of a Stock Operator by Edwin Lefèvre, I urge you to do so. A delight and gem of a book.)

This month a very small handful of indices have made new record highs – notably the three main US ones; this, per se, doesn’t mean their charts are bullish. On the contrary, many are very overbought on the relative strength index (RSI) and are displaying other signs of instability. Other important indices are still languishing below, or close to, record highs set decades ago, notably the FTSE 100 and the Nikkei 225.

Looking further south, Argentina’s Merval index soared through 2018’s highs (with a large, bullish Marabuzo candle) in June and tried to follow through this month. This year’s best-performing index, it had gained 38 per cent as at the end of last week, 32 per cent up at the time of writing. The trouble is, the Argentine peso lost 21 per cent of its face value from January to April, improving recently to a 12 per cent loss. Moody’s downgraded the nation’s outlook to negative from stable last weekend and it's facing a Presidential election in October, where two very different candidates are polling neck-and-neck. Serious headwinds here.

Also in South America, we turn to Brazil’s Bovespa, which rose steadily all year, up 14 per cent, while the local currency, the real, from being 8 per cent weaker against the US dollar in May is now 1 per cent stronger. This is on the lower house passing an initial round of critical pensions reforms, to be presented to the Senate in 60 days’ time. This chart is perhaps the more bullish of the two.

Over on the other side of the world, Russia’s MOEX index (used to be Micex) of the biggest 50 companies listed in Moscow has seen a solid 16 per cent appreciation. To this, one should add a 9 per cent appreciation of the rouble, making it a real standout. Now at the top of its long-term trend channel, expect consolidation in the second half of this year.

Not forgetting the Dow Jones Utilities Average, up 17 per cent, and the dollar index 3.5 per cent stronger. Utilities masquerading as bonds, this year’s rally to new record highs has been wonderfully steady and stress-free.