Are stocks really off to the moon?

There are a few times in stock market history when rationality goes totally AWOL and a mania envelops investors like a cloud.  We saw it in the 1990s in the Dotcom Bubble when the Nasdaq soared just on the basis of the projected eyeball count for iffy start-up tech companies.  Then, it crashed as reality bit, as it always does – but not before shooting for the moon. It has taken almost sixteen years for the index to regain those highs of that era but this time, actual revenues are being produced.

I confess I have been taken aback by performance of the US indexes for much of this year.  I had been looking for tops most of the year based on my reading of the Elliott waves and other inputs.   In fact, I did manage to capture some significant down moves, but since the Trump victory early last month, the sheer explosion of buying has been breathtaking.

Of course, much of the buying is down to short covering as many have been tempted into shorting, hoping for a turn.  These hapless traders are being killed.  Many are holding short positions without a stop loss as they hope and pray the market will turn down soon.

They have been so convinced by their own bearish feelings and from reading the postings of many pundits who post bearish articles explaining logically why the rally is false and why the global economies are heading for disaster.  And there is no shortage of bearish statistics in the US economy – I have referred to David Stockman’s postings as he is one of the more eloquent and rational commentators out there.  But he is not a trader!  And thereby hangs a crucial difference.

Yes, it is easy to convince yourself that investors are being foolish and creating a gigantic bubble that will pop with a vengeance (as did the Nasdaq in 2000).  While that is almost certainly the eventual outcome, in the meantime markets are rising rapidly and the mania is very much alive.  Standing in its way is like standing on the tracks as the proverbial express train hurtles towards you.  Not a sensible strategy for creating wealth.

Remember, markets can stay manic for far longer than you can remain solvent.  And I have noted that when I have a conflict with the market, the market wins every time!

It is social mood – or sentiment – that drives markets and this has been running red hot for some time.  One of the most important recent touchstones for sentiment was last month’s surprise Trump victory.  It was initially greeted by furious angry demonstrations and denials and calls for recounts, but now a month later it appears calm on the Trump front and I would say most accept that he will be the next President.  That rapid calming of this test of mood just shows that social mood remains positive.

If we were still seeing angry mobs in violent demonstrations in the streets,  that would indicate a darkening of mood -and the stock market would respond.  So for now, mood is positive and stocks remain in a hard bullish phase.

So let’s analyse the Dow to try to get a handle on the possible upside targets.

This is the weekly chart and shows my long-term blue tramlines from the 2009 low.

The market has just poked above my interior pink tramline and has indicated a five wave continuation (see text, pp 38 – 39, 144 – 145) and this gives a measured target in the 20,000 – 20, 500 zone.