And so, once more, after the short-lived “taper caper”, US stocks are on fire. From a cynic’s perspective, one that regular readers will know that I naturally gravitate towards, it could be suggested that the record highs we have been seeing over the past week are not so much grounded upon solid bullish economic factors, but rather the wall of worry once more being climbed as has happened appeared over recent years in this tepid posy GFC recovery period (and that is now in its 5th year innings…).
What can be seen on the weekly chart of the Dow Jones below is that, according to the way that I have drawn the main trend-lines from 2002, that this market has been in a 5000 point trading band for much of the past decade. Indeed, the only real deviation was during late 2008 to the autumn of 2009 when Lehman Brothers collapsed. At this point, there was an overshoot to the downside below the floor of the channel – then at 9,500. During the last 4 years, market tested the floor of the channel once and also the 200 week moving average at 10,500 in 2011 and has never really looked back. The explanation is that the fall of Lehman Brothers – stabbed in the back and front by its fellow investment banks (naming no names although you can probably guess…) did not prove to be the end of the world. However, it caught bears totally on the hop.
They were caught out again on the Fiscal Cliff saga (another “end of the world setup” at the beginning of this year that failed to transpire), somehow thinking that politicians would be the turkeys who voted for Christmas rather than release fresh funds to prevent the U.S. going bust / into recession. But enough people were fooled in terms of thinking there would be a double top for the Dow towards 14,000 – there was not and of course a massive H1 2013 rally duly ensued.
The final trigger for the recent stock price gains was Bernanke’s attempt at delivering a subtle hint in June as far as the end of QE was concerned. It failed so badly that it will be impossible for him to take away the punchbowl before he heads off no doubt to a cushy job on Wall Street in January.
But what is interesting about what I would call Double Negative rallies (two negatives making a positive) is that even though they are not based on any solid, constructive fundamentals at all – merely being the technicalities of traders being squeezed on their shorts for example, we find in the latest influential AAII Investor Sentiment Survey that investors are cock-a-hoop regarding U.S. stocks and their prospects. While such a state of affairs can exist for an extended period – usually longer than most bears can stay in position – we should be under no illusion that this is a House of Cards, especially when the retail fraternity are all revved up. It can be seen from the table below that not only did bullish expectations rise by a whopping 6.9% in just one week, but that at just under 49% it is nearly a fully 10% above the long term average.
The technical view may actually tie in quite well with the overcooked message from the market in the sense that we have the top of an 11 year price channel fast approaching at 16,000 for the Dow – a zone which even if it does not prove to be a lasting top, very likely will be a near term one. Indeed, the favoured scenario going into the autumn would be for at least a retest of the former 2007 resistance zone at 14,000 – something which would represent quite a shakeout in terms of those in the market currently bubbling with excitement as far as equities are concerned.