Several weeks ago we laid out our argument for why we did NOT believe that the US stock market (and by default global markets) were likely nearing a major top. (Click here to read the article) Today we analyse 9 very important US stock market charts, which provide further evidence to support our thesis.
US Dow Theory Buy Signal Confirmation
According to the well known theory by Charles Dow, founder of The Wall Street Journal, the US stock market is in a bull market when new highs in the Dow 30 Industrial index is confirmed by new highs in the Dow Transports index, or vice-versa. According to the theory, the US stock market and US economy is healthy if the companies that produce the goods (Industrial companies) are also able to sell their goods throughout the US economy or overseas. This demand for the products produced by the industrial companies should therefore be confirmed by strength in the performance of transport companies. Where one index fails to confirm the strength of the other, danger may be ahead.
Six (6) weeks ago the Dow 30 Industrial Average broke out of a 3 month correction and began hitting new all-time highs.
At the start of this month the Dow Transportation index also broke-out to new all-time highs, confirming the strength in the Dow 30 Industrial index.
While the Transports have subsequently pulled back into the corrective range, we will continue to view this breakout positively, so long as the average remains above its 50 day moving average. We would begin to reconsider this position if the Transports began to break this medium term up-trend.
US Financials Threatening a New Breakout
There is a widely held belief by market technicians (those that analyse chart patterns) that a bull market is not a healthy bull market unless financial stocks are also participating. Financial stocks, like banks, insurers, fund managers, are seen to be at the very heart of a capitalist system. When money is moving freely around the economy and investors are feeling confident about the future, financial stocks should do well as more money is lent, invested and borrowed. Financials don’t necessarily have to be leading the market higher, but they should be participating and hitting new highs in conjunction with the stock market and be in an up-trend along with the broader market.
Today, US Financials are in confirmed short, medium and long term up-trends as confirmed by the rising 10, 50 and 200 day moving averages. What’s more, US Financials are threatening a breakout to new recovery highs from a well formed 4 month ‘Cup and Handle’ corrective pattern.
NASDAQ, S&P 500 & Russell 2000 Hit New All Time Highs
The strength in the US stock market also appears to be broad based, as strength is being confirmed across all aspects of the market. That is, new innovative companies, which are predominately listed on the NASDAQ, have just hit new all-time highs.
At the same time, the broader S&P 500 also hit a new all-time high this week.
What’s more, the Mid-Cap and Small-Cap segment of the market is also hitting new all-time highs. If we were approaching a major market top, we would expect weakness to begin to present in this segment of the market first, as investors move to larger, more well known companies and participation in the bull market begins to narrow. But right now, we are just not seeing any evidence of this. In fact, the Russell 2000, which measures the price performance of the 1,000th to 3,000th largest company listed in the US, just hit a new all-time high after breaking out of a well formed 8 month flat corrective pattern.
Market Breadth is VERY Healthy
Before most major market tops, you would expect the number of stocks ‘Advancing’ in value relative to the number of stocks ‘Declining’ in value, would begin to decline and less and less stocks would be participating in the bull market. But that does not appear to be happening either.
Looking at the New York Stock Exchange ‘Advance-Decline Line’, we can see that new highs in price are being met with new highs in participation.
And it’s not just happening on the NYSE, below are the ‘Advance-Decline’ lines of the NASDAQ and S&P Mid Cap indexes.
If we continue to see evidence such as that above, we’ll continue to recommend our clients remain strong and long.
If you want to know which stocks we’re recommending today, that have huge upside potential, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn about our Quality, Value, Trend (QVT) investment selection methodology.
The information contained in this article is General in nature and has be