Episode 14 – Damien’s Midweek Markets Podcast – More new all-time highs or a double top?

11 min Read Published: 01 May 2019

The 14th episode of my weekly podcast show where I discuss what is happening in investment markets and what to look out for. Each show lasts between 10-15 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work. This week I also raise the question about whether the US stock market will continue to set new all-time highs or whether we are set up for a double top?

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Transcript - Episode 14 of Damien's Midweek Markets

Investment markets this week

Hello and welcome to Damien's Midweek Markets which is the show where I talk about what's going on in investment markets and what to look out for in the coming week ahead.

The last show was almost two weeks ago and since then momentum has continued to pick up in stock markets. The DAX, which is the German stock market, has continued to confirm the bullish momentum that we've seen in equities worldwide (which is positive for US equities). We've also started to see some bullish confirmation from different sectors within America stock markets too. We don't just want one sector to lead the market higher, as technology stocks have done recently, we want to see some follow-through from other sectors to help shoulder the burden.

Healthcare stocks had a very bad time in the last couple of weeks and there was a worry that it was a sign of increasing divergences within the stock market which could hint that the wider index would start to dip. Healthcare stocks have since had a turnaround in performance which is positive news for the future of the US equity rally.

However, there are still some negative divergences where certain sectors aren't all playing ball, but overall US equities still have a slightly bullish bias. That's also been confirmed by the S&P 500 hitting new all-time highs. It's not just one all-time high we've hit in the last week, but a number of all-time highs. New all-time highs after a correction like we experienced at the end of 2018 may suggest that the downtrend is over and that the sell-off was just a correction in the ongoing bullish uptrend over the last decade.

To confirm that fully what we'd like to see is the S&P 500 leap higher. The S&P 500 is sitting around 2950, meaning that it has leapt up about 50 points from the last time we recorded this show. If we can get momentum and push up to 3,000 that really does throw down a marker and I think you'd find hardly any bearish investors left in the market, which in itself could be a contrarian indicator. One of the catalysts for the latest uptick was a 'better than feared' earnings seasons.

There have been some real highlights this earnings season, particularly in tech stocks. Facebook and Microsoft produced stellar earnings reports. Of course, it's not all going to go the bulls way and indeed Google produced some disappointing results, yet it wasn't enough to set the market into a downward trend. This may have been because Apple's earnings report was well received a day later, sending the stock's price higher, and as the adage suggests "as goes Apple so goes the stock market". Because of Apple's size it has a huge influence on the wider stock indices in America, which has helped to push it higher this week.

Double top?

I often talk about the VIX, the market fear index, and it is still plumbing lows of 12 to 13. Crucially it's not getting above that important 15 level (which tends to be bad for stocks) at the moment. There really is very little fear in the stock market right now. If we want to see fear then what level on the S&P 500 would start to get investors little bit spooked? I think if we breakdown below 2900 and maybe 2890, then investors will start to question the uptrend in stocks and whether we're going to experience a double top. Until we break higher and we head towards that 3000 level on the S&P 500 you're going to hear the term 'double top' more often than not, especially if we start to get a little pullback. The stock market has rallied so strongly we're almost certainly a bit stretched. We almost need to have a little bit of a pullback, some respite from the almost seemingly never-ending rally that we've had in 2019, but if we do then you're going to get people start talking about double top formations.

Look at your stock market app on your smart phone, go back on the S&P 500, for example, and you will see in September the market peaked and then sold off in October. It then dipped down to a low on the 24th of December, Christmas Eve and has pretty much rallied ever since, back to new highs again. If we were to then suddenly sell-off from this point you can see you'll get the formation that goes up, down, up (close to the previous high point) and down, which is a double top. That can be a very bearish sign and if it does happen then we could be looking at lower lows. But it seems the statistically less likely thing to happen at the moment given what we're seeing in the stock market indices and the underlying stocks themselves. But still keep an eye on 2890 on the S&P 500.

What's going on elsewhere? The German DAX is still proving strong. We're seeing some positive action in European equity markets and the FTSE 100, although it's pulled back from where it was recently when it broke above 7,500. So while everything looks very good for the bulls and everybody is thinking that we're only going to head higher in the stock market, you've always got to be mindful of the other side of the coin. Some possible market moving events we've got coming up, that could be either positive or detrimental to the stock market rally, include the Federal Reserve's latest interest rate meeting. We're also seeing the dollar strengthen.

The dollar could be a problem

If you go and look at the Dollar Index, it's an index that basically measures the US dollar against a basket of currencies around the world, as this index rises (and therefore the dollar gets stronger) it can be bad news for US equities. Much in the same way as when a stronger pound hinders the FTSE 100. 80-20 investor members have been given some commentary and insight looking at levels on that dollar index to watch out for which could signal that the dollar is about to get even stronger, or even weaken. The latter would actually be a tailwind for the US stock market.

The other thing to have a quick look at is the US 10-year Treasury yield which we talked about on your stock app versus that S&P 500. The stock market is telling you everything is awesome but the bond market is still suggesting that everything isn't. Usually one of them has to be right.

So that's it for this week's Midweek Markets Podcast. Make sure you tune in next week. If you've got any questions then do email me at [email protected] Please share this podcast on social media. Tell everybody about it. I know a lot of you have been sharing the podcast on Twitter and Facebook and Instagram and it's made a big difference
to all the downloads we have. So thank you and please keep doing it.

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