One of the key pieces of analysis and discussion in the next teleconference for Gold Members will be the continuing upside for stock markets, in particular for the leader of the pack, the US stock market. In recent weeks there has been increasing discussion of the possibility of a melt-up before the melt-down, and quite substantial.
This time last year we did a blog called “The curse of 20,000”, and said:
“As I write the Dow Jones is at 19,963, and for the last month has been trying to break up through 20,000 –Trump-mania has pushed the market sharply higher but not yet through this round number barrier.”
This index has struggled with prior round numbers:
- It hit 100 in August 1922; it took another 19 years before it sustainably broke this level
- It tested 1,000 in December 1976, but it took another 6 years before it hit this level again
- It hit 10,000 with great fanfare in December 1999 – it took 11 years for that level to be seen again”
20,000 was brushed aside, and as I write the Dow Jones Industrial index is toying with 26,000. It is strange that from time to time stock markets do get stuck at round numbers. Put another way, markets also get drawn towards such round numbers.
Is an invisible hand now pulling the Dow Jones up to 30,000???
More seriously, some forms of cycle analysis do point towards higher levels. This can be useful in identifying a possible road yet to be travelled.
In the last teleconference in December I presented a simple outline of the cycles in a bull market, an upward trend for the stock market, based on what is called Elliot Wave Theory. The most prominent analyst is Robert Prechter (who coincidentally is also credited with predicting the 1987 Crash with uncanny accuracy).
To many it is bizarre that there should be mathematical relationships between the waves which make up such cycles. But if that sounds like a Holy Grail, it isn’t. There are a range of possible mathematical relationships, and the precise relationships are only known with hindsight. But that range does, Robert would say, allow you to set upside targets.
Robert and his team have been negative on the US stock market for a long time, and probably tend to be over-precise in saying not just that the end is nigh, but the end is nigh tomorrow at this price.
Recently they have again adjusted their upside target to 28,272 (with 1% leeway either way).
They also gave a target of 34,389 but said “it “seems too far away, so am dismissing it from consideration”. It piqued my interest when they said that at the time (19th December). I know everything is possible but not everything is probable, nonetheless this could become the biggest stock market bubble of all time, with even greater extremes of investor behaviour.
Then along came Jeremy Grantham on 3rd January (of GMO fame), who has been cautious for quite some time, and said that, after conducting some more detailed research, he thought we were likely to get a melt-up before a melt-down.
On extrapolating some of his numbers I came to a Dow Jones target of 34,305, remarkably close to the number dismissed by Robert Prechter.
Hmmm. Where we are now in market terms is both scary and exciting, as this mania continues to unfold. I will be broadening out this piece in much more detail in the next teleconference (24th January, midday) also highlighting how this might reflect on the UK, as well as other global markets.