Tag: Dow Jones Industrial Average

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Forward P/E turns back up

Dow Jones Industrials

Dow Jones Industrial Average continues to climb, heading for a target of 21000. Rising troughs on Twiggs Money Flow signal strong buying pressure.

Dow Jones Industrial Average

The S&P 500 follows a similar path.

S&P 500

With the CBOE Volatility Index (VIX) close to historic lows around 10 percent.

VIX

However, at least one investment manager, Bob Doll, is growing more cautious:

“…we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”

Forward P/E Ratio

Bob Doll’s view is reinforced by recent developments with the S&P 500 Forward Price-Earnings Ratio. I remarked at the beginning of February that the Forward P/E had dropped below 20, signaling a time to invest.

Actual earnings results, however, have come in below earlier estimates — shown by the difference between the first of the purple (latest estimate) and orange bars (04Feb2017) on the chart below.

S&P 500 Forward Price-Earnings Ratio

In the mean time the S&P 500 index has continued to climb, driving the Forward P/E up towards 20.

This is not yet cause for alarm. We are only one month away from the end of the quarter, when Forward P/E is again expected to dip as the next quarter’s earnings (Q1 2018) are taken into account.

S&P 500 Forward Price-Earnings Ratio

But there are two events that would be cause for concern:

  1. If the index continues to grow at a faster pace than earnings; and/or
  2. If forward earnings estimates continue to be revised downward, revealing over-optimistic expectations.

Either of the above could cause Forward P/E to rise above 20, reflecting over-priced stocks.

Be fearful when others are greedy and greedy only when others are fearful.

~ Warren Buffett

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Dow and Nasdaq: It’s a bull market

The Nasdaq 100 is in blue sky territory, having broken clear of its Dotcom high at 4900. Rising troughs on Twiggs Money Flow signal long-term buying pressure. A correction to test the new support level remains likely but this is unlikely to upset the bull market.

Nasdaq 100

The Dow Jones Industrial Average is also in a bull market, headed for a test of 21000. Twiggs Money Flow troughs above zero again indicate strong buying pressure.

Dow Jones Industrial Average

The Dow Jones Transport Average is also in blue sky territory having respected its new support level at 9000. The up-trend provides bull market confirmation required by classic Dow Theory.

Dow Jones Transport Average

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Dow: Expect further advances

The Dow Jones Industrial Average respected support at 20000, signaling another advance. Probably to 21000 but it could carry as far as the upper trend channel at 22000. Twiggs Money Flow troughs above zero indicate strong buying pressure.

ASX 200

* Target: 18000 + ( 18000 – 16000 ) = 20000

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Dow breaks 20,000

The Dow Jones Industrial Average broke the important psychological barrier of 20,000 this week. The news was greeted with cheers from the media, many advisers and investors.

Dow Jones Industrial Average

Older readers may recall a similar event when the Dow broke 1000 on November 14, 1972. Here is an excerpt from the New York Times that day:

The Dow Jones industrial average closed above the 1,000 mark yesterday for the first time in history.

It finished at 1,003.16 for a gain of 6.09 points in what many Wall Streeters consider the equivalent of the initial breaking of the four-minute mile.

“This thing has an obvious psychological effect,” declared one brokerage-house partner. “It’s a hell of a news item. As for the permanence of it — well, I just don’t know.”

Last Friday, the Dow surpassed 1,000 during the course of a day’s trading, but it fell back below the landmark figure by the end of the session.

But yesterday the market was not to be denied. The Dow finally put it all together, the peace rally, the re-election of President Nixon, the surging economy, booming corporate profits and lessening fears about inflation and taxes and controls and other uncertainties of 1973.

…..International Business Machines, Wall Street’s best known glamour issue, moved up 11 1/4 points to 388, its best price of the day.

…..An office broker, watching the stock tape from his desk downtown, murmured in wonderment: “There’s a sort of renewed confidence in the whole economic outlook.”

The broker who questioned the permanence of the move must have had a crystal ball. Three months later, the Dow reversed below 1000, commencing a bear market that ended at 570.

Dow Jones Industrial Average

Four years later, in 1976, the Dow again rallied and broke 1000. Only to retreat in another bear market that carried as low as 750. A third advance carried the Average above 1000 in 1981, before another retreat, this time to 780.

Only in 1982, a full ten years after the first breakout, did the Dow finally break clear of 1000, advancing strongly over the next few years.

The next significant barrier for the Dow was 10,000. Breakout took place in 1999, during the Dotcom boom, with a minimum of fuss. At least one pundit at the time predicted the Dow would reach 100,000 by 2020.

Dow Jones Industrial Average

Contrary to initial indications, the 10,000 level also proved a formidable barrier, with breach of support in 2001 heralding the start of a bear market that fell as low as 7200.

Recovery in 2003 appeared robust, with two secondary corrections respecting the new support level at 10,000. But the global financial crisis in 2008 saw the Dow fall to 6500. It took more than ten years after the initial breakout before we could comfortably say that the Dow had broken clear of 10,000.

The next important barrier is the current 20,000. It may be naive to think we have seen the last of it.

If past records are anything to go by, we could be in for an interesting decade.

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It’s a bull market

Dow Jones Industrial Average successfully tested the new support level at 18000 and has now broken resistance at 19000, confirming the target of 20000*. Rising Twiggs Money Flow indicates selling pressure has ended. Expect a brief retracement to test support at 19000 but respect is likely.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18000 – 16000 ) = 20000

Charles Dow, founder of Dow Theory more than a century ago, always waited for confirmation from the Rail Average. Nowadays, railways have diminished in importance and we use the broader Transport Average which currently signals a primary up-trend after a lengthy “line” or narrow consolidation over the last 3 months.

Dow Jones Transport Average

It is also advisable to look for confirmation from the broader S&P 500 and the tech-heavy Nasdaq 100 index.

The S&P 500 broke resistance at 2200, signaling a primary advance with a target of 2300*. Rising Twiggs Money Flow again indicates that selling pressure has ended.

S&P 500 Index

* Target medium-term: 2200 + ( 2200 – 2100 ) = 2300

The Nasdaq 100 recently set an all-time high after breaking resistance at its March 2000 high of 4700. Retracement twice respected the new support level and follow-through above 4900 would confirm another primary advance.

Nasdaq 100

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Fedex surges

Bellwether transport stock Fedex surged to a new high this week, signaling an expected rise in economic activity in the US. A Twiggs Money Flow trough above zero also indicates strong buying pressure.

Fedex

Dow Jones Industrial Average is testing resistance at 19000. The doji star indicates indecision rather than a reversal. Declining Twiggs Money Flow indicates long-term selling pressure but completion of a trough above zero would negate this. A fall below 18500 would warn of a correction. Follow-through above 19000 is less likely but would indicate a fresh advance.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18500 – 17000 ) = 19500

The S&P 500 is testing resistance at 2200. The evening star pattern again indicates indecision rather than reversal. Breakout would complete a bullish inverted scallop pattern, which commenced in early July, signaling an advance to 2300. Declining Twiggs Money Flow remains bearish, favoring another retracement.

S&P 500 Index

* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300

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Dow breaches 18000

Dow Jones Industrial Average broke support at 18000, warning of a test of primary support at 17000. Bearish divergence on Twiggs Money Flow indicates long-term selling pressure. Recovery above 18500 is now unlikely but would signal another primary advance.

Dow Jones Industrial Average

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Dow selling pressure

The S&P 500 is retracing for a test of short-term support at 2150. Respect of the rising trendline would signal a test of 2200. Breakout above 2200 would complete an inverted scallop (or fish hook) with a target of 2400*. Declining Twiggs Money Flow, however, warns of selling pressure. Breach of 2050 would test medium-term support at 2100.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 1800 ) = 2400

The Dow Jones Industrial Average also displays a potential inverted scallop on the weekly chart. Follow-through above 18600 would confirm but bearish divergence on Twiggs Money Flow again warns of selling pressure. Tall shadows on the last two candles also suggest short-term selling pressure. Breach of support at 18000 would warn of a test of primary support at 17000.

Dow Jones Industrial Average

* Target medium-term: 18500 + ( 18500 – 18000 ) = 19000

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Crude oil and buybacks

At present, stock prices are heavily influenced by the price of crude oil. Whichever direction crude takes, stocks are likely to follow. The current rally in Light Crude (June 2016 Futures) is testing resistance at $42/barrel. Respect would warn of another test of primary support at $32. Breach of $32 would offer a target of $22/barrel* but we are more likely to see further consolidation (between $32 and $42) first.

WTI Light Crude June 2016 Futures

* Target calculation: 32 – ( 42 – 32 ) = 22

Another major factor influencing prices is corporate buybacks. Lu Wang at Bloomberg points out that inflows/outflows from managed funds are dwarfed by repurchases:

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

Corporate buybacks v. Fund Outflows on S&P 500

Of more concern is that we are approaching the March quarter-end. Repurchases are expected to fall dramatically in April.

Global

Dow Jones Global Index continues to test resistance at 300 and the descending trendline. 13-Week Twiggs Momentum continues to flag a strong primary down-trend. Respect of resistance is likely and reversal below 290 would warn of another decline. Breach of 270 would confirm. Penetration of the descending trendline, however, would warn that the down-trend is losing momentum and a bottom is forming.

Dow Jones Global Index

* Target calculation: 270 – ( 300 – 270 ) = 240

North America

The S&P 500 broke resistance at 2000 and rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of short-term support at 2100 would indicate a rally to 2100. But I remain wary of this rally.

S&P 500 Index

A look at the monthly chart explains why. Respect of 2100, or even a feint (false break) above the previous high of 2170 would keep the weight on the sell side (an outgoing tide). Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

A CBOE Volatility Index (VIX) peak below 20 indicates that (short-term) market risk has eased. But our longer-term risk measures continue to warn of elevated risk.

S&P 500 VIX

Canada’s TSX 60 is testing resistance at 800. Expect stubborn resistance at the former primary support level. A correction to test support at 700 is likely. Recovery of 13-week Twiggs Momentum above zero would indicate that the primary down-trend has ended. Penetration of the descending trendline suggests that a bottom is forming. A higher trough on the next correction would be a bullish sign.

TSX 60 Index

Europe

Dow Jones Euro Stoxx 50 found resistance at 3100 but bullish divergence on 13-week Twiggs Money Flow suggests that a test of 3300 is likely. The primary trend remains down and a lower peak, followed by reversal below 3000, would warn of decline to 2500*.

DJ Euro Stoxx 50

* Target calculation: 3000 – ( 3500 – 3000 ) = 2500

Germany’s DAX is similarly testing resistance at 10000. Breakout would indicate an advance to 11000. Buying pressure on 13-week Twiggs Money Flow appears secondary. Reversal below 9300 would warn of another decline.

DAX

* Target calculation: 9500 – ( 11000 – 9500 ) = 8000

The Footsie found stronger than expected resistance at 6250. Reversal below 6000 would warn of another test of 5500. Breach of the descending trendline suggests that a bottom is forming. A higher trough would favor a reversal. While a trough above zero on 13-week Twiggs Money Flow would strengthen the signal.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index is consolidating in a narrow range between 2700 and 2900, suggesting continuation of the primary down-trend.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index encountered stubborn resistance at 17000. Respect would warn of another test of 15000, while breakout would be likely to encounter further resistance at 18000. 13-Week Twiggs Money Flow holding above zero is encouraging but I expect the primary down-trend is far from over.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is testing resistance at 25000. Rising 13-week Twiggs Money Flow reflects strong (medium-term) buying pressure. Narrow consolidation below resistance suggests breakout is likely, which would test the upper trend channel at 26000. Respect of the trend channel is likely and would warn of another test of 22500*.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

Australia

The ASX 200 is testing resistance at 5150 and the descending trendline. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. This is a bear market and respect of resistance is likely to warn of another decline. Penetration of the descending trendline, however, would warn that a bottom is forming. Reversal below 5000 is likely and would warn of another test of 4700, while breach of 4700 would offer a target of 4400*.

ASX 200

* Target calculation: 4800 – ( 5200 – 4800 ) = 4400

The Banks Index is also testing its descending trendline. Respect is likely and would warn of another decline. Penetration would again suggest that a bottom is forming.

ASX 300 Banks

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Flying on one engine

Market direction is dominated at present by wild swings in the price of crude oil and other commodities (iron ore in Australia).

WTI Light Crude June 2016 Futures

The rally (WTI Light Crude June 2016 futures) may run as high as $44/barrel before retracing to test support. Primary support sits at $30 and a higher trough, following breach of the descending trendline, would suggest that a bottom is forming. But that is far from definite as Patrick Chovanec at Silvercrest points out:

….so far this year stock market sentiment has taken many of its cues from the price of oil. On any given day, if you knew which way oil prices moved, you probably could tell which way the stock market moved. While we believe this linkage fails to recognize the critical distinctions we have so often highlighted, it can’t be ignored in anticipating future market movements, at least in the near-term. The recent firming of oil prices reflects some important developments. After more than a year, we are finally seeing the initial signs of capitulation on the supply side: U.S. oil output has topped out and the most vulnerable OPEC members are agitating for cutbacks. Nevertheless, accumulated crude oil inventories remain at record high levels, which makes us wary concluding that the oil market has reached a hard bottom. While we think the oil price, and the producer industry, will gradually recover, we also think “consensus” expectations of a dramatic +20% gain in S&P 500 operating earnings this year, driven by a large and sudden rebound in the energy and materials sectors, continue to be overly optimistic. With this in mind, we are likely to see more sentiment-driven volatility in U.S. stock prices ahead, even as the U.S. economy continues on its path of slow growth.

Global

Dow Jones Global Index is testing resistance at 300. Respect is likely and reversal below 290 would warn of another decline. 13-Week Twiggs Momentum continues to flag a strong primary down-trend. Breach of 270 would confirm. Penetration of the descending trendline is unlikely but would warn that the down-trend is losing momentum and a bottom is forming.

Dow Jones Global Index

* Target calculation: 270 – ( 300 – 270 ) = 240

North America

“When you fly in a twin-engined aircraft and one engine cuts out, take comfort that the other engine will carry you to the scene of the crash.”

Whenever I see the market index gradually rolling over in a broad topping pattern I am reminded of this saying by my Irish friend Ollie Flynn (who did a lot of flying in light aircraft to remote locations). When there is no sudden shock, like Lehman Brothers’ collapse or LTCM, the market can remain undecided for a considerable time before rolling over into a hard down-trend.

The monthly chart of the S&P 500 is flying on one engine. Currently testing resistance at 2000, a peak at this level would strengthen the warning of a bear market. But even a peak at 2100 would keep the weight on the sell side. Follow-through below 1850 would confirm another decline. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure but the overall trend is down.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) below 20, suggests that (short-term) market risk is easing. Respect of this level (on the next spike) would strengthen the signal.

S&P 500 VIX

Canada’s TSX 60 penetrated the descending trendline after breaking resistance at 750, suggesting that a bottom is forming. Expect stubborn resistance at 800. Rising 13-week Twiggs Momentum is so far indicative of a secondary rally rather than reversal of the primary down-trend. Depth of the next trough will provide a better indication as to the likelihood of a reversal.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Europe

Dow Jones Euro Stoxx 50 found resistance at 3050 but bullish divergence on 13-week Twiggs Money Flow suggests that a test of 3300 is likely. The primary trend remains down and a lower peak, followed by reversal below 3000, would warn of a decline to 2500*.

DJ Euro Stoxx 50

* Target calculation: 3000 – ( 3500 – 3000 ) = 2500

Germany’s DAX displays a similar pattern, testing resistance at 10000. Breakout would indicate an advance to 11000. Buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 9300 would warn of another decline.

DAX

* Target calculation: 9500 – ( 11000 – 9500 ) = 8000

The Footsie found resistance at 6250, but this may be short-term and we can only expect committed resistance at 6500. Reversal below 6000 is unlikely at present, but would warn of another test of 5500. Breach of the descending trendline suggests that a bottom is forming. A higher trough would favor a reversal. While a trough above zero on 13-week Twiggs Money Flow would strengthen the signal.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index continues to test support at 2700, with no indication of the recent excitement in iron ore markets. The primary trend is down and likely to remain so.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index found resistance at 17000. Respect would warn of another test of 15000, while breakout would be likely to encounter stubborn resistance at 18000. 13-Week Twiggs Money Flow holding above zero is encouraging but I expect the primary down-trend is far from over.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is testing resistance at 25000. Rising 13-week Twiggs Money Flow reflects strong (medium-term) buying pressure. Breakout is likely and would test the upper trend channel at 26000. Respect of the trend channel remains likely and would warn of another test of 22500*.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

Australia

The ASX 200 is testing resistance at 5150, with rising 13-week Twiggs Money Flow indicating (medium-term) buying pressure. This is a bear market and respect of the descending trendline is likely, warning of another decline. Reversal below 5000 would warn of another test of 4700, while breach of 4700 would offer a target of 4400*.

ASX 200

* Target calculation: 4800 – ( 5200 – 4800 ) = 4400

It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

~ Jesse Livermore

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