The big picture

October 30, 20137 Comments

djia1900sI promised a look at the “big picture” in an earlier blog, so here goes.

The long termed picture presents a bit of a puzzle right now. As you will see on the long DJIA chart above (1900 – present), the Dow has been through 4 major consolidations over the past 113 years. The first three were decidedly sideways periods, all had a defined ceiling overhead over multiple years. Investors made little on their capital beyond dividends in those years. The most recent “lost decade” demonstrated more of what might be an expanding formation on the DJIA. This formation is usually considered bearish, given that it implies ever-increasing levels of volatility. So too has the very broad NYSE composite index—recall though that the NYSE composite is comprised of a wide gambit of market capitalization, so it is a somewhat different animal than the Dow. Nonetheless, it gives signals as to the health of the broader markets overall – and it’s most certainly been entrenched in a long termed expanding pattern. See chart below.  So – if expanding patterns are bearish, that means we should all run for the hills, right?

nyse

 

The problem with assigning a blanket “bear market is coming” prognosis to the US market right now is this: The broader large-cap S&P 500 index hasn’t shown the aggressive expanding formation noted on the DJIA above over the past 13 years. Instead, the S&P has been largely flat over this period (yes, there was a nominally higher high between 1999 and 2007 – but I discount this <2% difference). Recently the S&P broke out from its sideways trading range.

One of these charts is not like the other

Compare the DJIA chart at the top of this page to the S&P 500 chart below during  the 1965 -1973 period.  During the ’65-’73 period, the S&P 500 formed an expanding formation, while the DJIA had flat resistance. This timeframe was the greater part of that  consolidation period which ended in 1982. The recent expanding formation on the DJIA (1999-2013) was not confirmed by an expanding formation on the S&P 500. The S&P was flat over the past 13 years.

They didn’t confirm each other in the ‘70’s either – although it was the Dow that was flat, while the  S&P formed an expanding pattern. The ’65 – ’82 expanding formation on the S&P 500 ended with its largest decline of that period–in 1974. After a few more years to recover, the 1982 – 1999 bull market was born. Perhaps the similarly massive 2008 meltdown completed the DJIA expanding pattern that formed during the past 13 years. If patterns repeat, then we should be entering into a multi-year bull market at this time.

SPX1960s

The mid-termed view

So lets now take a look at the mid-short termed view. My view on the broader markets are for a relatively small 3-4% near-termed pullback, followed by a likely continuation on the bull trend (see Monday’s blog).  Perhaps the remaining upside for stock markets will be more tepid in the coming months, but I do believe markets still have a little left in them yet.

Yes, we are due for a normal (i.e. not of the 2001 or 2008 magnitude) bear market correction sooner or later. Below is a chart showing the past 13 years on the S&P 500. You’ll note the rhythm on this chart (cycle period) is about 5-6 years. If you have heard me speak at a conference before, you will know that I do not get too tied up in picking the exact dates where a cycle is due to trough. Instead, I note a rhythm to the markets, and the current rhythm appears to be a tendency for troughs to occur about every 5-6 years. If we measure from the last trough in 2009, a 5-6 year period would suggest the next bear market bottom in 2014 or 2015. This suggests a market peak either very soon (the coming months) or later in 2014.

s&p corrections

 

In summary, I believe that the very big picture is bullish for the US markets (perhaps less so for Canada given the commodity exposure). The recent lost decade, which I accurately predicted way back in 2001 (visit www.valuetrend.ca, click on the button at the bottom of the site to read my article published in January 2001) is over. I believe we are in a new big-picture bull market. However, we are due for a mid-termed bear market correction beginning sometime in the next year or so. Before that time, I believe that there is time for one last dance at this party before it ends.

 

Keith on BNN

I’m on BNN’s popular MarketCall Tonight show on Tuesday November 5th at 6:00pm. Feel free to phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]

Be sure to mention that you read my blog when you call!

And BTW—thanks for the comments – they do help inspire the topics that I post, so never be afraid to add your two cents worth. I read them all.

7 Comments

  • Hi Keith
    I’m not sure if i’m right or not but it looks to me like the GLD is forming a head & shoulders bottom? and if it is what level would it have to cross to confirm the pattern?

    Reply
    • Tom, when attempting to identify any type of bottom consolidation pattern, first look for the trendline (down) to be broken. In this case, gold’s down trendline, which began around September 2012, has not been broken–the trendline was tested in the recent rally and failed -Yes, the recent trough of 1260 was ahead of June’s trough of 1170–but we need to take out 1420 prior peak before I get excited- No bottom formation yet.

      Reply
  • BEARISH SETUP FOR COMMODITIES?

    DESPITE MARKETS TRADING AT ALL TIME HIGHS,COMMODITIES HAVE BEEN STUCK IN A RUT SINCE THE 2008 PEAK. THE CRB COMMODITY INDEX HAS STRUGGLED AT A DECLINING TRENDLINE FOR OVER FIVE YEARS AND NOW A BEARISH SETUP FOR FURTHER DOWNSIDE IS BECOMING APPARENT. A POTENTIAL HEAD-AND-SHOULDER TOPPING PATTERN IS SHOWING UP ON THE CHART WITH THE NECKLINE AT 275. ON THE FLIPSIDE, A BREAKOUT ABOVE RESISTANCE JUST BELOW 300 COULD SUGGEST AN END TO THE NEGATIVE LONG TERM TREND FOR THE COMMODITY BENCHMARK.
    P.S.: THE CHART SHOWN IS A 12 YEARS ONE (MONTHLY) WITH A DESCENDING TRIANGLE FORMATION ABOUT TO BE RESOLVED (EQUITY CLOCK 31/10/2013.

    Reply
  • Hi Keith,

    I love the charts you posted up today, very insightful. One thing I do notice is the the SPX had 3 peaks during its expanding pattern. On the the peak the SPX had its largest decline. Now in comparison, the Dow is currently in the process of making its third peak. So wouldn’t that mean that we are closed to a substantial decline based on the SPX expanding pattern?

    Parm

    Reply
    • Hi Parm
      Both indices saw 2 peaks–in 2000 then 2007. the only difference was that the Dow was expanding, while the S&P saw a flat resistance point. And it would be premature to say the current market rally is a peak–no evidence of that yet.

      Reply
  • Great charts Keith. Thanks for a great review of the current outlook. Is there any way to extrapolate back the NASDAQ as well? I know it’s still below the bubble highs of 1999-2000 but it’s completely blown away its 2007 highs.

    I am also amazed that the DOW was the same in 1906 and in 1942, a period of 36 years! I don’t hear that comparison discussed often.

    Reply

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