This week brought an unexpected twist: oil prices did not decline, but rather surged instead. It’s curious how this upturn was interpreted as a positive sign for the stock market.
For reasons that remain unclear, the rise in oil prices has been seen as indicative of strong demand. Perhaps it signals economic resilience in the face of ongoing declines in U.S. factory orders for five consecutive months. Whatever the case may be, the specifics remain uncertain.
What is clear is that on Tuesday, the DOW experienced a significant leap of over 300 points, with all 30 DOW stocks closing higher than they opened. The following day, it rallied another 211 points. Is it possible there has never been a more exhilarating time to be involved in the market?
At the Economic Prism, we suggest savoring this upward trend while it lasts. The euphoria it brings can be thrilling. However, history suggests that such surges inevitably lead to a subsequent decline. This pattern is a familiar one.
The economic landscape is complex, with some elements strengthening while others falter. However, it is rare for all sectors to decline simultaneously. Yet, there are unsettling signs within the financial markets for those who take the time to look closely. It seems that stock prices may not sustain their momentum for much longer.
DOW Theory Signals Major Down Trend
Mark Hulbert, of The Hulbert Financial Digest, has been analyzing stock price trends for nearly a lifetime. He has documented the market’s fluctuations and patterns in his newsletter since 1980, skillfully examining the dynamics of fear and greed.
Through his extensive experience, Hulbert has gained valuable insights into bull and bear markets. He has witnessed how euphoric rallies can sometimes give way to sharp downturns, leaving many on Wall Street taken aback. His latest observation is a stark warning.
“The U.S. stock market’s major trend now is down, so act accordingly,” wrote Hulbert on Tuesday. “This is the conclusion drawn from the Dow Theory, one of the oldest and most widely-used stock market timing systems. Established over a century ago by William Peter Hamilton, then editor of the Wall Street Journal, this theory was introduced gradually in the paper’s editorial sections during the early 20th century.
“According to two of the three Dow theorists monitored by the Hulbert Financial Digest, the first hurdle was passed as the market fell from its December highs to the lows of mid-January—resulting in a 4.1 percent drop in the Dow Industrials and a 6.1 percent drop in the Dow Transports.
“This initiated the Dow Theory clock for the remaining hurdles. The second was indicated during the market’s recovery, where neither index succeeded in surpassing its December highs. The final hurdle was crossed last week when the Dow Industrials closed below their mid-January lows on January 28, closely followed by the Transports two days later at Friday’s close.”
What Groundhog Day Means for Stocks
Last year, the strategy of ‘buying the dips’ proved rewarding for investors. In contrast, this year may call for a strategy of ‘selling the rallies’ for those who are wise. At the very least, holding a bit of cash at this moment wouldn’t be a poor decision.
On Monday, Punxsutawney Phil emerged and saw his shadow, signaling a forecast of six more weeks of winter according to lore. If only the stock market could enjoy such simplicity. Here’s the reality…
Look around. You may sense your own shadow lurking nearby. The chilling winds of deflation could be sweeping across the landscape.
Despite the global efforts of central bankers aimed at inflating financial markets, indicators suggest they are not moving in the desired direction. Currently, the 10-year Treasury is yielding just 1.8 percent, and it appears the recent rise in oil prices may fizzle out before gaining real traction.
It won’t be long before the stock market catches on as well. Corporate profits cannot continue to reach new peaks indefinitely; stagnation is imminent. At that point, prevailing valuations may appear wildly inflated.
In conclusion, it may be prudent to brace for a significant downturn in the stock market.
Sincerely,
MN Gordon
for Economic Prism
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