Is the stock market at dangerous levels? Investors probably wonder this a lot, and with the Dow Jones Industrial Average up around 16,000 people have been doing just that lately (December 2013). In this week’s Mullooly Asset Management podcast Tom and Brendan discuss a recent MarketWatch.com article titled, “Market Could Be Hitting a Dangerous Triple Top“.
The article, written by financial writer Mark Hulbert, caught our attention yesterday. It mostly captured our interest through the usage of the term “triple top”. A “triple top” is a pattern that we’re familiar with from point and figure charting. However, this column from Hulbert wasn’t using a point and figure chart. Instead it took the highs of the Dow from 2000 and 2007 (11,700 and 14,700 respectively), and compared them with the index’s current level. To do this they utilized inflation adjusted terms. In doing so they created what they called a “triple top” on their chart.
Tom and Brendan share their thoughts on the “dangerous triple top” discussed in the MarketWatch article. An important point to keep in mind is that most people don’t discuss numbers in inflation adjusted terms. If you wouldn’t discuss salaries or home values in inflation adjusted terms, then why would you discuss the level of the Dow Jones Industrial Average in them? Another thing to consider is that the stocks that make up the Dow haven’t been identical since 2000.
So is the stock market at dangerous levels now in December of 2013? Our point and figure charts (provided by Dorsey Wright and Associates) show us that the Dow’s long term chart last gave a sell signal in September of 2011. In 2013 we have seen market drama in the form of the fiscal cliff, budget deals and breakdowns, tapering in May, the bad bond market, and rising inflation rates. The market has continued to plow on though. So what does this mean? Well, the first sell signal in a long term uptrend like this is usually a false reading. That doesn’t mean we won’t pay attention to it, we’re always watching! However, it likely wouldn’t be a reason to panic.
What worries most people is that with the Dow up around 1600, a 5% pullback would be 800 points. That’s enough to rattle most investors. One thing that clients of Mullooly Asset Management can absolutely count on is that, “when the charts change, we WILL change”.
Tune into this week’s podcast and hear more on this topic from Tom and Brendan.