The Bull Market No One Believes In

The Bull Market No One Believes In

By: Clif Droke | Tue, Feb 14, 2017


The stock market continues to make new highs, yet none of the signs which
accompany a market bubble are evident. Investors are asking, “When will the
Dow finally correct?” By “correct” they mean “decline.” However, a market correction
doesn’t always entail a decline for the major averages and can sometimes take
the form of a lateral consolidation or trading range. That appears to be the
case for the 2-month period from December through early February when the Dow
and S&P made little headway.

In fact, in January the Dow Jones Industrial Average (DJI) recorded its tightest
trading range of only 1.1% in over 100 years. This continues a prolonged sideways
pattern in the Dow and other averages since mid-December when the post-election
rally reached a plateau. The question everyone was asking was whether this
plateau was merely a temporary “pause that refreshes” in an ongoing rally or
the end of the rally and the prelude to another market setback. The Dow provided
the answer to that with the last week’s breakout above the top of the trading
range ceiling. It has rallied each day since, putatively on the hopes generated
by President Trump’s forthcoming tax-related announcement.

Dow Jones Industrial Average Daily Chart

While the bull market in equities continues, a surprising number of investors
are either mistrustful of the rally or outright bearish. According to a recent
article in BBC News, there are a growing number of wealthy and politically
liberal U.S. citizens who are doing things in the wake of Donald Trump’s election
that were commonly seen by politically conservative citizens during the Obama
years. That is, they are buying guns, becoming survivalists, and preparing
for an impending catastrophe related to the Trump presidency, the article reported.

It was also reported that a number of wealthy Americans are preparing for
what they believe is the apocalypse. According to Business Insider,
some have purchased underground bunkers while other wealthy individuals are
planning to emigrate to New Zealand. “Saying you’re ‘buying a house in New
Zealand’ is kind of a wink, wink, say no more,” said Steve Huffman, CEO of
the Reddit web site. “Once you’ve done the Masonic handshake, they’ll be, like,
‘Oh, you know, I have a broker who sells old ICBM silos, and they’re nuclear
hardened, and they kind of look like they would be interesting to live in.”

The common denominator in these accounts is fear among the upper class. The
dread of an uncertain future which was pervasive among America’s middle class
for much of the last eight years has now been transferred to the upper class.
While it might be premature to ascribe this to the recent rush back into gold,
bond funds and other safe-haven investments, it would seem that there is just
enough uncertainty among the upper crust to account for the lack of movement
in the major stock market indices since December.

Tight, narrow trading ranges in the major indices are launching pads for major
moves in either direction. In the context of a bull market, they typically
represent rest and consolidation before the next move higher. The odds technically
favored this outcome, yet a substantial number of investors still don’t believe
in the strength of the bull market. This is reflected in the manifestations
of fear among the upper class mentioned above, as well as in the path the market
rally is taking.

There is talk among some observers that the market is undergoing a “melt-up”.
This is an erroneous application of that term. A classic melt-up is characterized
by a runaway, almost straight-up and sustained market rally on high volume
with widespread participation. The trajectory of the major indices since November
can hardly be described as “melting up.” Rather, the market’s path has been
measured and well-ordered, as the daily chart of the NYSE Composite Index (NYA)
attests.

NYA Daily Chart

The real melt-up phase of this bull market hasn’t even started yet. We’ll
know it has arrived when we see runaway stock prices coupled with increased
participation among the legion of retail investors still on the sidelines.
Even institutional investors are surprisingly tempered in their usual optimism,
as expressed in their collective 2017 forecasts. Melt-ups have a way of surprisingly
even the bulls in how high they carry the market averages before peaking.
For now, though, a combination of fear and cautious optimism holds sway among
investors and this alone is enough to argue that the bull market still has
legs.


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Clif Droke

Clif Droke
ClifDroke.com

Clif Droke is a recognized authority on moving averages and internal
momentum. He is the editor of the Momentum Strategies Report newsletter,
published since 1997. He has also authored numerous books covering the fields
of economics and financial market analysis. His latest book is Mastering
Moving Averages
. For more information visit www.clifdroke.com

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Published at Tue, 14 Feb 2017 11:25:43 +0000

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