Don’t be blind-sided by historic week

Fri 24 Aug 2018

By Brian Dennehy

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Market commentary

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Since January I have mostly observed the US stock market through the prism of Elliott Wave analysis – a simple concept, though not always easy to apply in practice. This week the US market was lauded because it is now officially the longest bull market in history.
 
The analysts typically call a bull market one which hasn’t been interrupted by a 20% correction. I’m not sure it is a terribly useful definition. But it does give a sense that we are much nearer the end than the beginning.
 
3,453 days without a 20% correction. On 22nd August 2018 the bull run which emerged from the ashes of the Great Financial Crisis edged past the 1990-2000 uptrend which was followed by the technology-led Crash, when the mainstream market fell 50% over three years.
 
Charles Mackay, author of one of my favourite books*, famously said that men go mad in herds, but only recover their senses slowly, and one by one. A neat oft-repeated quote but it doesn’t do justice to the full story.
 
Investors join the herd one by one. The bigger the herd of investors gets, the greater the madness which fuels their over-confidence and complacency. By the time we get near the peak we can observe this madness in numerous ways – some numerically (CAPE), some not.
 
In the latter category are newspaper headlines and media coverage generally. These tell us about sentiment, and in particular are great evidence of extremes in sentiment (on which do read the blogs last week on the emerging opportunity-cum-punt in gold).
 
The news of the record US stock market uptrend was interesting. But how it was reported is very valuable.
 
For example, Bloomberg headlines trumpeted that the rally was “just getting started”, that the market was “impervious” to falls, and that there was “no sign of stopping now”. Others said this bull market has “room to run” and that there are “no signs of bears”.
 
This is exactly the sort of extreme sentiment which we expect as we move towards an important peak.
 
What will follow that peak? Something like the Crash of 2000-2003? Or that of 2008/9? Or little more than a whimper, like the “February wobble” this year. We don’t know with precision. But you must stay on your toes, as the days and weeks unfold.
 
What is clear is that the US is not a safe haven. Stay focussed on your holdings and your plan. Don’t get distracted by either Trump’s tweets or the Turkish lira’s roasting.
 
Yes, either of the latter could be the final snowflake which brings the avalanche-prone snowy slope crashing down. But, as I have said many times before, don’t get distracted by trying to anticipate or analyse the final snowflake.
 
It is the S&P 500 which has been the main focus of analysis since January, in particular using Elliott Wave analysis to help us shine a light ahead – so we don’t get too surprised by the scale of unfolding events – managing our expectations if you like.
 
For the record, the S&P rose to 2873.23 during the day on 21st August, less than 0.5% higher than the peak of 2872.87 on 26th January. It didn’t hold above that level at the close. Our analysis led us to believe from January that we would see another high. Was that it earlier this week? We can’t know with certainty, but it doesn’t feel like it.
 
Nonetheless, as I said in the recent teleconference, we are measuring the current potential of the pivotal US stock market in days and weeks. Be prepared. 
 
 
 
* Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841

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