Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17
Protect Your Savings With Gold: ECB Propose End To Deposit Protection - 14th Nov 17
Gold on the Ledge, Trend Forecast - 14th Nov 17
The Unbearable Slowness Of Fourth Turnings - 14th Nov 17
Silver Sign’s Confirmation & More - 14th Nov 17
Could This Be The End for Tesla? - 14th Nov 17
Harry Dent’s Fourth Cycle: More Evidence of Stock Market Downturn - 14th Nov 17
Why Having Good Credit Is Important If You Want to Invest - 14th Nov 17
The Bitcoin Bubble Explained in 4 Charts - 13th Nov 17
How the US Has Secretly Subsidized China to Produce Eco-Unfriendly Solar Panels - 13th Nov 17
The Increasingly Unstable Middle East Must Be On Every Investor’s Radar - 13th Nov 17
Stock Market Critical Supports are Being Challenged - 13th Nov 17
The One Chart All Investors Should See Before 2018 - 13th Nov 17
Short-Term Stock Market Uncertainty Following Recent Rally, Will Stocks Continue Higher? - 13th Nov 17
Is Hillary Just the “Fall Guy” for the Intel Agencies and their Moneybags Bosses? - 12th Nov 17
Stock Market Correction Phase - 12th Nov 17
Finally, The Fall Of The House Of Saud - 12th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

3 Reasons The Stock Market Is Nowhere Near A Crisis

Stock-Markets / Stock Market 2017 Aug 31, 2017 - 03:21 PM GMT

By: John_Mauldin

Stock-Markets

Bearish investors see many reasons to be cautious now and little grounds for optimism. Others are stalwartly bullish. Naturally, I have friends on both sides of this debate, people with deep knowledge and experience.

Problem is, they can’t all be right. The stock market will move up or down (or possibly sideways), and some of us will be wrong.

Now, let’s see what the bulls have to say.


Dow Theory Still Bullish

Longtime readers know how much I admired the late Richard Russell, editor of Dow Theory Letters. Richard stuck to his methodology despite his own misgivings. By its nature, Russell’s version of the Dow Theory gives very long-term buy and sell signals.

Richard left us in 2015, but other analysts follow strategies similar to his.

According to newsletter tracker Mark Hulbert, these analysts are now uniformly bullish. Benchmarks confirmed the bull market by reaching new highs this summer.

One question remains. Dow Theory looks at the relationship between the Dow industrials and transports averages, and the transports have pulled back since mid-July.

That shift might mark the beginning of a bigger downturn, or it might not. Here’s how Hulbert explains it:

Ominous though this sounds, however, Moroney and the other Dow Theorists I track are still bullish. That’s because the stock market must jump over three successive hurdles to generate a bear-market signal, and it hasn’t even cleared the first.

Those three steps are:

1. Both the Dow Jones Industrial Average and the Dow Jones Transportation Average must undergo a “significant” decline after hitting new highs – “significant” both in terms of time and magnitude.

2. In their subsequent “significant” rally following the decline referred to in step No. 1, either one or both of these Dow averages must [fail] to surpass their highs.

3. Both averages must then fall below their lows registered at the bottom of the decline referred to in step No. 1.

Notice that I put “significant” in quotes. That’s because there isn’t universal agreement on what magnitude of market moves is necessary to satisfy. Some Dow Theorists argue that, per Hamilton’s original indications, a move under the first step isn’t “significant” unless it lasts at least three weeks and corrects at least one-third of its previous move. On this interpretation, the market hasn’t come close to that first step.

Depending how you look at it, then, the Dow Theory signal is either in full-on bull market mode or might be taking a small step back.

In either case, it is nowhere near bearish, and Dow Theory followers see no reason to sell. If anything, by their lights they should be buying more.

Elliott Wave Hangs On, Too

The Elliott Wave Principle, all the rage in the 1980s, is less influential now but is still watched by the technical analysis team at Goldman Sachs.

The Elliott Wave comprises sequential upward and downward market moves—“waves”—that form repeating cycles. A full cycle has 8 waves. Waves 1–5 are bullish, with only minor pullbacks between.

Waves 6–8 are corrective, or bearish, and you do not want to be long when they happen.

The market is presently in wave 4, according to Goldman market technician Sheba Jafari. That means the next downturn will be limited and followed by another bullish wave. Then we would see a bigger correction.

Jafari explains this analysis with the following chart, recently published in Business Insider week.

Like Dow Theory, Elliott Wave is very long term. The correction between waves 4 and 5 could last a year or more. The bullish wave 5 could last another year after that.

By this view, we are still a couple of years away from a major bear market, with profits still to be made on the long side.

Am I convinced? No. But serious people are, and you should know what they’re thinking.

All About the Profits

Let’s look at the fundamentals. When you buy a stock, you are really buying its future earnings: Each share’s price is the discounted present value of its expected future earnings.

Prices change when expectations change, which happens for many different reasons.

The present bull market is still with us in large part because earnings are pretty good. With most of the second-quarter reports now in, FactSet reported in its August 11 letter a 10.2% blended S&P 500 earnings growth since the same period in 2016.

Earnings grew in every sector except Consumer Discretionary.

More impressive is that companies also expanded their net profit margins.

The bars above show net profit margins by sector for the second quarters of 2017 and 2016. The only sector to see compressed margins was Consumer Discretionary, and only by 0.2 percentage points.

Forget for a moment that these are public companies. Imagine it’s your own business.

Not only are you nicely profitable, you are even more profitable on each dollar of revenue (which also grew) than you were a year ago. And that’s after you paid yourself a handsome salary and bonus.

Are you happy? Of course you are. Would you be eager to sell your business to someone else? Maybe, but you would ask a premium price for it. That’s essentially the calculation stockholders are making right now.

Business is good and getting better. No reason to sell at anything less than full price, generously defined.

Reluctant sellers mean higher prices. That’s the foundation of this bull market. The market will likely fall if the foundation erodes, but that hasn’t happened yet.

A Simple Rule for Private Investors

The systems I covered above are rather complex. However, one simple rule of thumb can enable you to benefit from a bull market and avoid the worst of a bear market: When your stock or index goes above the simple 200-day moving average, you are in the market; when it falls below that average, you are out.

I will explain some of the complications and caveats momentarily.

I had my friend Steve Blumenthal send me the following four charts of the Dow, the S&P 500, the NASDAQ, and the Russell 2000.

The first three are all above their 200-day moving average, and the Russell just dipped below its 200-day average. I post the charts so you can see the ebb and flow over time.

Relying on the 200-day moving average is not the best system, and some traders will note that point approaching and play games to take away some of your potential earnings. But if you don’t have a system, you’ll miss out, and the 200-day moving average works better than no system at all.

There are better rules and moving averages to use, but that’s what my clients pay me for, and I’m giving you this for free. Further tip: Different indexes and stocks and other markets have different relevant moving averages.

Yes, this system has flaws, and so do others. There is no perfect system. If you’re going to trade the markets, you are going to have losing periods. If it were easy, everybody could do it.

But at least you can do the simple stuff to minimize the losses and maximize the gains. I know successful commodity traders who are right only 40% of the time. But they cut their losses quickly, and when they catch a big run it really makes a difference.

But when I tell you to have a system that allows you to hedge your investments, at least do that at a minimum. Do not simply be passively long and forget about it. You will not like the correction that accompanies the next recession—whenever it comes.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife