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I'll be the first to admit -- because of a macro-economic backdrop that has elicited what I believe are three ominous, unprecedented phenomena that provide for unparalleled uncertainty in regard to the globe's financial future (e.g. the three are: (1) unprecedented global debt and leverage, (2) unprecedented central bank liquidity injections into the world economy in an effort to correct imbalances, and (3) global fiat currency solidarity), I have looked with skepticism at this cyclical stock market rally, and in the last three years have observed and entertained numerous technical divergences within the capital markets. Yet each time these technical divergences have ultimately been ground-up like chuck meat by the market's incessant rally, even though some of those divergent indicators provided priceless alerts during previous market periods. So what's different this time?
The answer may lie in the effects rendered by number (2) above. If extra liquidity into the global economy has filtered into stocks, or if a self-fulfilling perception of extra liquidity lifting stock prices has done so, does it really matter? Stocks have moved higher. Some have suggested the rise has been artificial, and they may be correct. In fact, I share that view. But considering the trillions of dollars that have been or may be implemented, can anyone say with certainty just how high or how long stock prices might be lifted, even if the rally is artificial? I ask this because there is currently a chorus of prominent naysayers in regard to any further rally. They are analysts whose opinions are always main stage news. They are an intelligent, well-respected group, and may be correct about this. But I'd like to show you some charts so you can perhaps better appreciate what they're up against when making their call for an imminent top.
Like many within this group of noteworthy naysayers, I too believe that market fundamentals always govern market movements. But let me suggest this – market fundamentals are sometimes too complex for their market implications to be fully and properly understood, in particular when it comes to the timing of the market's movement; and I'm further speculating that this current unprecedented period, with its seemingly endless array of central bank interventions, may be one of those times.
On the other hand, charts never lie, and are very straightforward in their objective renderings for markets. As we'll see, the charts are currently bullish; and anyone suggesting otherwise is picking a top. Granted, the temptation to pick a top has been great, especially when the global economic landscape has been seemingly void of sufficient nutrients. But even though I've likewise previously succumbed to this temptation, this current chorus of naysayers gave me cause for a poetic pause. I reviewed my charts, and was reminded of two adages that I found most useful during my trading career. "The trend is your friend." And, "Top pickers and bottom pickers become apple pickers." No offense to any naysayers. I'll bow in praise if the market soon drops 20%. But since I rarely made money picking tops in strong uptrends, I will instead choose to let the market's price action and chart performance indicate a top. Now let's look at five charts that presently confirm a strong uptrend.
The first is the S&P 500 Index chart. The market closed the week at the high of its rebound since the 2009 low. The bullish trend channels are delineated, and the index's all-time high (e.g. horizontal white line) is within sight.
The next chart is the Dow Jones Industrial Average Index. It too closed at recovery highs, is solidly placed in a bullish trend channel, and has its all-time highs in sight.
Next is the Nasdaq 100 Index. The bullish trend channel is noted, but this index is not currently making cyclical recovery highs; and its all-time high is substantially higher. This could be viewed as one of those divergences I mentioned; but as I stated, divergences of this sort have thus far proved of little value and have instead been shredded as indicators.
The next chart is the Dow Transports Index. You can again see the bullish trend channel. Also, note the virulent upward slope of the current rally, as the index blasted through its all-time high (e.g. the horizontal thick red line).
The final chart is the Russell 2000 Index. It similarly sports a strong upward slope as it propels itself above its previous all-time high (e.g. shown in green), and breaks out from a large ascending triangle formation (e.g. shown in blue).
In conclusion, I guess I'm considering that central bank interventions may possibly be underappreciated in their ability to lift stock prices, even if they eventually fail and the market once again proves to be a bubble. Along similar lines, I believe the strong uptrends confirmed by current charts suggest it's premature to call a market top. However, I'm not suggesting that you buy stocks or refrain from short selling. The naysayers could be correct about an impending market correction and it could start tomorrow. Instead, my main objective is to present the case that the current trend for stocks is up, and to inform you that you're picking a top if you believe otherwise. A top could soon be placed, but after viewing these charts, perhaps you can now better appreciate what you're up against if you're thinking about bucking the trend.
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© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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