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8 March 2012

Volume is Dow’s weakness

With the Dow gaining almost 100% from its March 2009 low and Barron’s magazine proclaiming “Dow 15,000” on the cover of a recent issue, it appears that bullish sentiment prevails. So are we set for further gains for the rest of 2012 and beyond?

Ari Wald, technical analyst at Brown Brothers Harriman in the US, is a long-term bull but does not see the Dow reaching 15,000 this year, or even 14,000. He maintains that 13,000 remains a significant resistance level for the index; “Investor optimism is largely priced into the market so further gains will be limited.” (See Figure 1 below).

Albert Edwards of Societe Generale is more pessimistic still and sees stocks falling back sharply this year, describing the latest price gains as an “idiot's rally”. Jim Rogers is not far behind seeing 2013 and 2014 as being bad years as monetary policy easing comes to an end.

Volume appears to be the key indicator right now and Wald believes, “A breakout to higher levels would need to be confirmed by higher buying volume”. In fact, the Dow’s rally since the start of the year has been on declining volume which is usually a warning signal that a rally will stall (see Figure 2).

Significantly, the current rally has so far failed to reach the previous peak reached on 12 October 2007 of 14,093 (based on weekly closing) and it could be argued that the market ‘should’ have gone higher by now. Mike Shell of Shell Capital Management in the US has looked at the Dow going back to 1940 and has calculated that it typically takes the market 2.2 years to return to the high that existed before the bear market began (see Figure 3).  This time around it’s been 4.5 years and counting. 

Using Kondratieff cycles analysis, Valerie Gastaldy, an analyst at Paris-based research house, DayByDay, sees a market low coming in 2012, corresponding with a typical low that happens in the tenth year of the 54 year Kondratieff cycle. However, this low will be short-lived and new market highs will quickly follow as we go into a seven to nine year period of a generally bullish part of the Kondratieff cycle. As such, Gastaldy believes the 2012 low will present a good opportunity to enter long into US stocks. (See Valerie Gastaldy's online presentation). 

Mark Newton, chief technical analyst at Grey Wolf Execution Partners in New York, perhaps sums up the mood of the market with a view that is consistent with all of them (bar Jim Rogers) and cautiously optimistic in the medium to long-term. He expects a low in 2012 and a sees further gains for the Dow towards the end of the year. He told the Technical Analyst, “I see a seasonal correction starting in the next few weeks which will take the market lower into late summer / early autumn before a strong rally occurs through the US election into year-end.  I expect gains of roughly 5-10% for the DJIA this year.”

However, Newton is wary of calling the top just yet. “Technically speaking there are insufficient signs with regards to actual price deterioration to warrant calling for the top of the rally which began in early 2009.” He warns that early signals of a late summer correction are based on falling volume, cyclical patterns, fewer stocks reaching new highs and falling momentum (see Figure 4).

Click on thumbnails below for Figures 1 to 4.

No new bull market for Nikkei?

The recent rally of the Nikkei since late November and this month’s subsequent break through its 200-day moving average signals the possible start of a bull market, according to several analysts. Moreover, the 50-day moving average has also (just) crossed above the 200-day, a Golden Cross scenario which is unambiguously bullish for the index (see Figure 1).

Nevertheless, history suggests that this does not signal the start of a long term bull market. The same set of technical circumstances existed in mid 2009, late 2010 and last summer. On these occasions the market went on to rally up to 10% but fell back; the market has remained essentially range bound since then.

Click on thumbnail below for Figure 1.

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