S&P and Dow Both Hit All-Time Highs: So Bull Market Continues...Right?
Did you hear the trumpets blare yesterday? The S&P and the Dow both hit all-time highs on the same day. That's "ALL-TIME" in case the sound wasn't clear and distinct enough. So the bull market that began in 2009 continues...right? Looks like we're off to the races again after a couple of scares in January and again in July...right?
Well, if you believe that, here's some advice in the Wall Street Journal you may want to follow:
One reason for our skepticism here: What happened to all the talk of sluggish world economies, the threat of spreading deflation, and the proliferation of negative interest rates? None of those trends have changed. But no worries, it seems the eternal optimists of Wall Street have at least one circumscribed area on which to hang their hopes:
As for stocks, each time they threaten to break down, miraculously "something" pops up that convinces buyers to jump in. This time, it may have been Ben Bernanke's recent visit to Japan, where he met with Japanese central bankers. (Our former Fed Chairman was there as an employee of hedge fund Citadel.) The scuttlebutt was that one of the subjects discussed was "helicopter money." If that's true, the Japanese may be first in on a new round of central bank madness. Since they were first in on QE, why not helicopter money? However they execute the dropping of essentially "free" money into their ailing economy, their central banker brethren around the world will be watching. Meanwhile, Wall Street licks its chops in the belief that massive new injections of "liquidity" will re-fire the stock market furnace.
Of course, we're just speculating here. We don't really know if "the Bernanke" was called in to goose the goose that keeps laying the golden egg of stock gains. But there's something we do know and it's what's keeping us from jumping in to the stock market with both feet: The price action of the Dow Transportation Average.
You see, while the S&P and the Dow both hitting highs on the same day does have a powerful "feel" to it, such an event doesn't really have a track record of indicating the future direction of the stock market. What does, on the other hand, is the action of the Dow Industrial Average and the Dow Transportation Average. When they both hit new highs, that's a powerful coincidence that frequently indicates the primary trend of the market will be up. But here, rather than coincidence, we find instead divergence. When the Industrials hit their previous high on May 19, 2015, the Transports weren't even close to their highs. In fact they were well on their way down from their highs in 2014. And when the Transports don't confirm the action of the Industrials, that divergence typically signals that something's not right.
So what about this new high in the Dow? Well, the Transports did rise too. But, again, their rise was well within the downward trend range that has dominated their action since late 2015. If anything, this additional divergence makes us even more wary of stocks.
On the other hand, if the Transports, in coming weeks, turn around and head up, ultimately exceeding their highs of late 2014, the story changes. What do we need to see to think this may occur? First we need to see the Transports break out of their downward channel. That channel of lower highs and lower lows has been in place since April. But even if we get a higher high in coming days and weeks, the Transports would still need to rise almost 1,000 points, and need to do so pretty soon. The longer the interval between an Industrial new high and a Transport new high, the less reliable it would be to give us a glimpse into the future trend. While anything's possible, we have to consider a 1,000 point rise in the next few weeks highly improbable.
To sum up, new highs in the S&P and Dow don't really tell us much. Even less would they cause us to make any serious investment decisions. Short-term trading is, of course, another story.
Well, if you believe that, here's some advice in the Wall Street Journal you may want to follow:
“As the environment looks less scary, it makes sense to go after what was perceived as being these riskier, growth-oriented stocks,” said Karyn Cavanaugh, senior market strategist at Voya Investment Management. “Once people think there’s a little less risk, they’ll go pay for these growth stocks.”Good luck with that trade. Really, good luck. You never know.
One reason for our skepticism here: What happened to all the talk of sluggish world economies, the threat of spreading deflation, and the proliferation of negative interest rates? None of those trends have changed. But no worries, it seems the eternal optimists of Wall Street have at least one circumscribed area on which to hang their hopes:
In the U.S., investors are now turning their attention to earnings season, which ramps up this week.Things sure do turn around quickly these days, don't they?
A strong set of corporate earnings would be “the icing on the cake” for the Federal Reserve in terms of confirming the need to start raising interest rates, said Peter Westaway, chief European economist at Vanguard.
As risky assets gained, haven investments retreated. Government bond yields continued to rise from recent record lows, with the yield on the 10-year U.S. Treasury note climbing to 1.512%, from its record low of 1.366% on Friday.Of course, there's another way to view these recent price swings that's far less complicated: Nothing rises or falls in a straight line. The so-called "haven" assets were chugging along, virtually unencumbered by significant reversals. Perhaps their time has come. It would only be the natural breathing in and out of markets to see U.S. Treasuries and gold at least take a breather, if not even settle down for a summer respite.
Gold, another asset that surged after the U.K. referendum, fell 1.5% to $1,334.10 an ounce--its largest one-day percentage decline since May 24.
As for stocks, each time they threaten to break down, miraculously "something" pops up that convinces buyers to jump in. This time, it may have been Ben Bernanke's recent visit to Japan, where he met with Japanese central bankers. (Our former Fed Chairman was there as an employee of hedge fund Citadel.) The scuttlebutt was that one of the subjects discussed was "helicopter money." If that's true, the Japanese may be first in on a new round of central bank madness. Since they were first in on QE, why not helicopter money? However they execute the dropping of essentially "free" money into their ailing economy, their central banker brethren around the world will be watching. Meanwhile, Wall Street licks its chops in the belief that massive new injections of "liquidity" will re-fire the stock market furnace.
Of course, we're just speculating here. We don't really know if "the Bernanke" was called in to goose the goose that keeps laying the golden egg of stock gains. But there's something we do know and it's what's keeping us from jumping in to the stock market with both feet: The price action of the Dow Transportation Average.
You see, while the S&P and the Dow both hitting highs on the same day does have a powerful "feel" to it, such an event doesn't really have a track record of indicating the future direction of the stock market. What does, on the other hand, is the action of the Dow Industrial Average and the Dow Transportation Average. When they both hit new highs, that's a powerful coincidence that frequently indicates the primary trend of the market will be up. But here, rather than coincidence, we find instead divergence. When the Industrials hit their previous high on May 19, 2015, the Transports weren't even close to their highs. In fact they were well on their way down from their highs in 2014. And when the Transports don't confirm the action of the Industrials, that divergence typically signals that something's not right.
So what about this new high in the Dow? Well, the Transports did rise too. But, again, their rise was well within the downward trend range that has dominated their action since late 2015. If anything, this additional divergence makes us even more wary of stocks.
On the other hand, if the Transports, in coming weeks, turn around and head up, ultimately exceeding their highs of late 2014, the story changes. What do we need to see to think this may occur? First we need to see the Transports break out of their downward channel. That channel of lower highs and lower lows has been in place since April. But even if we get a higher high in coming days and weeks, the Transports would still need to rise almost 1,000 points, and need to do so pretty soon. The longer the interval between an Industrial new high and a Transport new high, the less reliable it would be to give us a glimpse into the future trend. While anything's possible, we have to consider a 1,000 point rise in the next few weeks highly improbable.
To sum up, new highs in the S&P and Dow don't really tell us much. Even less would they cause us to make any serious investment decisions. Short-term trading is, of course, another story.
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