This week on the Mullooly Asset Management podcast Tom and Brendan discuss the new high set yesterday by the Dow Jones Industrial Average. The new high broke the previous record set on October 9, 2007. So what does this mean moving forward? Well it can certainly take a long time to get these market tops, however it doesn’t mean that the market is going to collapse. We currently see no risk in any of our long term indicators. After the previous high in October of 2007, the market ended up bottoming out on March 6, 2009. This shows that markets can rise quickly, but come crashing down in a matter of months.
After the market’s high in October of 2007 there were some differences between the long term indicators we saw then, and the ones we are seeing now. The percentage of funds in positive trends flipped to the O’s in November of 2007, and gave a sell signal in January of 2008. On top of that the relative strength of the S&P500 vs. cash turned negative as well in November of 2007, and gave a sell signal in June of 2009. Having two of three long term indicators in the O’s is not good for making money. We know this because of the point and figure charting methods we use. As if those two were not enough already, the bullish percent of all mutual funds flipped to O’s as well in November of 2007, and gave a sell signal in July of 2008. When these long term indicators provide us with red flags, we need to be cautious.
Getting back to yesterday’s Dow Jones high and what it means to us now, the media hypes the Dow Jones Industrial Average and its new high. Where we want to be focused is the S&P500, here’s why. According to Dorsey Wright and Associates the mutual funds and ETF’s that track the Dow Jones Industrial Average add up to $27 billion, however the mutual funds and ETF’s that track the S&P500 add up to $1.5 trillion. Get the picture?
Chart courtesy of Dorsey Wright and Associates
So while the S&P500 is at 1541 today, and we might experience a very normal pullback; the overall long term indicators are still looking good for us. A lot of people have had questions concerning yesterday’s Down Jones Industrial Average high, and this podcast should answer all of them. If it doesn’t feel free to reach out to us via email or phone call.