Don’t look now, but Tuesday marks the 17th anniversary of when the DJIA first hit 10k. Most investors are well aware that this important psychological barrier was first reached back in 1999, but likely are scratching their heads as to why the DJIA hasn’t been able to replicate this success doubling again to 20k despite having traded above 10k since the beginning of the 21st Century. Historically ,this length of time is certainly not radically different then what we’ve seen during past cycles. The DJIA first reached 1000 back in 1966 which produced a top that lasted largely until the early 80’s, nearly 15 years later. In fact, our initial brush with 100 on the DJIA occurred back on Jan 12, 1906 and it took nearly 22 years that time to reach 200, and then another 27 years to double again, at 400 back in late December 1954.
So what does 10,000 mean now? And when can we expect to reach our next significant milestone, DJIA 20,000? Despite the upward trajectory since 2009, indices largely stalled out over a year ago and have made scant progress. Despite the volatile swings, indices largely have gone “nowhere” since the latter part of 2014. While indices remain within fractional distance of all-time high territory, the underlying deterioration has affected most stocks in a much more dramatic and negative fashion. Just within the last two month, we saw Over 60% of all stocks having traded down more than 20% from their 52-week highs, yet the DJIA never declined more than 3,000 points from all-time high territory, or 16% at its greatest span between highs and lows from last Spring. At present, the DJIA lies within 5% of all-time high territory again, but there remain troubling technical signs that the damage caused by our correction into lows last August and this current Jan/Feb might have some long-lasting effects which could produce further volatility, particularly on the downside, before the long awaited march to 20,000 continues.
The following are negatives to consider: The rally since 2009 represents one of the longest rallies in history without a 20% correction, (Behind long bull runs from the 1990’s, 1950’s) and typically, a peaking out of a 6 year + Bull run tends to end badly, with indices dropping 30-50% before recovering. Second, momentum is negatively sloped on monthly charts as some of the traditional technical indicators like MACD, or RSI have dropped to new yearly lows last August 2015. Third, long-term trendlines were broken on a logarithmic basis in the SPX along with the MSCI World index, suggesting that we’ve seen a real change in trend. Even if prices can manage to push back to new highs, the strength of the price move likely will not be able to help carry momentum back to new highs, suggesting that rallies should be used for profit-taking. Fourth, the High yield market remains tenuous, and while we’ve seen a recovery in WTI Crude and High Yield markets of late, JNK, the Barclays High Yield ETF has reached areas of resistance in the short run and it’s decline typically tends to lead Equities lower based on historical correlation.
However, number of bullish arguments support further rallies between now and early Summer. First, the deterioration in the benchmark indices (not broader stocks ) which has occurred has been minimal. Indices now lie within 5% of highs, despite the selective leadership, and the two drawdowns since last Summer look very mild from a traditional chart reading perspective to make too much of the pattern to suggest the trend has truly changed. Second, breadth has shown some severe upside positive thrust in the last few months, and many indicators of momentum and breadth have hit the highest levels since early 2009 directly following QE. Typically, this is very positive, and suggest that the rally has some additional upside. Third, sentiment remains subdued. Factors like Poor Earnings, slow growth, Fed uncertainty, geopolitical concerns, US Political Election uncertainty, and the fear of a rising US Dollar have kept people on the sidelines in the last few months, as opposed to being busy buying dips and few have captured the 13% rally off the lows from mid-February. AAII, DSI, Investors intelligence all show Sentiment to not be near the levels where any sort of serious top should occur. Fourth, we’ve begun to see some broadening out in the sector movement, as might be expected with many breadth indicators surging to new yearly highs. The utilities and Materials move has now been joined by Industrials, Technology and to a lesser extent Consumer Discretionary with Healthcare seeming promising at this time.
In summary, Technically I think it’s likely that indices move back to new highs by late Spring/Early Summer of this year and take on a normal pattern of seasonality in 2016. This should call for a rally to new highs, a peak in late Spring Summer , followed by a decline into lows in September/October before turning back higher in 4Q. Yet, given the broader deterioration present in most stocks, which hasn’t completely recovered, , it’s safe to bet to conclude that a larger peak looks to be occurring in the market which began last year and could result in our long awaited 30-50% decline over the next couple years. If this 16-18 year cycle plays out like we’ve seen over the last 100 years, the Period from 2000-2018 would suggest we should be near the end of our cycle which largely mimicked the period from 1929-1947, or 1966-1982, the latter being when the DJIA first made its sojourn above 1000 for the first time. However, this doesn’t preclude a large downward swing that normally comes after extended bull runs during these cycles before the new bull emerges.
For now, the bullish factors seem to outweigh the Bearish factors for the next few months, but if this thinking is true, rallies back to new highs should be used for profit-taking for our long awaited Bear market to come out of hibernation yet again..