Beware: Market is close to dangerous 'triple top'
The Dow has run up to -- and been turned away from -- 16,000 twice before.
By Mark Hulbert, MarketWatch
Here’s something really scary: The stock market may be forming a dangerous triple top of major long-term significance.
That’s because the Dow Jones industrials ($INDU), in inflation-adjusted terms, is no higher today than it was at the 2000 and 2007 tops. It should give us pause to note that the market -- strong as it has been -- is only back to the level that turned the market back on two prior occasions.
That puts the market in a “make-or-break” position. On the one hand, it would be a sign of significant strength if the market were able to break through the “resistance” created by the 2000 and 2007 tops.
On the other hand, if the market were to turn down from close-to-current levels -- and thereby form a triple top -- then it would mean that the market on three occasions had tried, and failed, to break through to higher levels. According to the theory behind technical analysis, that would mean that current levels represent particularly strong resistance -- and make it that much harder for the market to break through in the future as well.
In other words, if you believe in technical analysis, the market is at a very critical juncture.
Take a look at the accompanying chart, which plots the Dow in constant 2013 dollars.
Compared to the Dow’s current level of close to 16,000, the October 2007 bull market top was near 15,800 and the Dow at its early 2000 top stood at close to 16,200.
To be sure, as David Aronson points out, a chart of the inflation-adjusted S&P 500 index tells a slightly different story. Aronson is president of Hood River Research, a firm that employs sophisticated modeling to “enhance the profitability of quantitative investing strategies,” and the recent author (with Dr. Timothy Masters) of “Statistically Sound Machine Learning for Algorithmic Trading of Financial Instruments.”
For example, while the inflation-adjusted S&P 500 currently is ahead of where it stood at the October 2007 market high, it is below where it stood in early 2000. Still, Aronson said in an interview, the picture painted by the S&P 500’s inflation-adjusted chart is broadly similar to the message of the Dow chart: “From a technical analysis perspective [the S&P 500 is] in a zone of resistance based on the two prior highs.”
Also worth noting is that this analysis focuses on price levels and does not include dividends. Though the market’s dividend yield over the last 15 years has been quite low, the inflation-adjusted market today would be modestly higher than at the 2007 and 2000 peaks if dividends were taken into account. However, Aronson argues, it wouldn’t be so much higher as to invalidate the concern about a potential triple top.
To be sure, the market may resolve its current critical juncture by headed higher rather than turning down. Yet Aronson notes that other indicators are also flashing caution.
One to which he draws special attention is known as the Value Line Median Appreciation Potential, or VLMAP, for short. This represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time. But for brief exceptions, the VLMAP currently is lower than it’s been in many decades.
For example, the VLMAP today stands at 30%, where it’s been for seven straight weeks. Prior to the October 2007 peak, it got this low for just one week. And it never got this low in the months leading up to the 2000 market top. ( Read a column I devoted earlier this year to the VLMAP. )
In fact, you have to go all the way back to early 1969 to find another time in which the VLMAP spent as long a period at 30% or below. From then until the market’s December 1974 low, of course, the Dow fell more than 40%.
When coupling the bearish message of the VLMAP with the potential triple top of the inflation-adjusted market, Aronson thinks we should be worried about where the market is headed.
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It's time to go back to basics and look at the forest instead of the trees. Equity markets are trading at all-time highs. Under normal circumstances, we should be getting close to a good time to sell. But with QE being shoved down our throats and a bunch of other things artificially propping up the economy, etc..., it's nearly impossible to get a read on exactly where we're at. Bottom line, what's the best we can reasonably hope for before the inevitable correction? A 5% move above all-time highs? A 10% move? Did you ever hear someone lament the fact that they moved to cash when indices were trading near all-time highs?
At some point, you go from being smart to being greedy, and then to being stupid. Evenutally, everyone who acts stupid will pay the price.
Well.... why chart back to only 1990? ..or for that matter, why not chart back only a decade... to 2003? I agree, Brent, we can find a chart to fit our point of view.
We are seeing Financial Engineering on a level not seen before due to the Feds printing to Infinity propping up Stocks and Worthless $500-700 Trillion in Scam Banking Derivatives. Meanwhile Corporations care not to pay a living WAGE as they now feel they can keep all profits to themselves. This will end badly. The last time the Wealth Divide was this great, The Great Depression.
The crbaby bears would like this story.I`m a chart man myself,but,you can always find a chart
to capture your point of view.
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The Federal Reserve and Congressional politics threaten to rain on the market party.
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