ARTICLES

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

The chart shows the previous cycle low at 4117 which happened on the 27^th of October 2023. Then in late December of 2023 and early January of 2024 there was a period of “backing and filling,” just below the previous cycle high at 4796. The upside break came on the 19^th of January when the index broke decisively up through that resistance to a new all-time record high.

The resistant effect of any long-standing previous cycle high, like this one, is shown by the initial difficulty which the index experienced in breaking above it. This is very typical. Any previous all-time record high, which has been standing for a long time, can be expected to arrest upward momentum and sometimes even to stop it completely (resulting in a “double top”). This type of resistance can also be seen at large round numbers – as in this case the index level of 5000 which proved to be a temporary psychological barrier. Once that barrier was convincingly penetrated there was a surge of buying exuberance which took the market up even further.

However, nothing in the market moves in a straight line. And this market is definitely long overdue for a significant correction. The regular appearance of corrections is probably one of the most reliable and consistent maxims of technical analysis. When there has not been a correction for an extended period of time, as is the case now, then it is a clear indication of excessive bullishness in the underlying market.

Investors have literally become over-excited by the strong upward momentum together with the penetration of major barriers like the 5000 level and the 4796 level. To the bulls, the upward momentum is beginning to be seen as a “new normal”.

Of course, it is always difficult to predict exactly when a correction will occur, and this market could certainly go higher - but experienced technicians become increasingly nervous when faced with such a long period of upward movement. The smart money begins taking profits and making it difficult for the bulls to take the market even higher. This causes a loss of upward momentum, which often presages a downward trend.

On the fundamental front, the S&P500 has been buoyed by the good results coming out of hi-tech companies, most notably Nvidia’s recent results for the 4^th quarter of 2023. The company posted revenue of $22,1bn – which was 22% above the 3^rd quarter and up 265% from a year ago. Nvidia produces a chip which is specifically designed for artificial intelligence (AI) systems. The CEO, Jensen Huang, said, “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations.” 

The current situation is similar in many ways to that which occurred in the 1920’s when the widespread use of telephones, mass-produced motor vehicles and the spread of railways had an enormous nation-wide impact on productivity leading to a stock market boom. AI is a development which is potentially impacting the productivity and profitability of almost all companies.

But we say again, nothing in the markets moves in a straight line. Some sort of correction is inevitable, sooner or later.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES - AUGUST 2018

The Bull Trend Resumes

A week ago on the 22^nd of August, we suggested in an article that the S&P would break up to a new record high above 2872. It has done that emphatically – rising to another record and breaking above the 2900 level last night to close at 2914. We also suggested in that same article that this would cause our blue chip shares to follow suit

Mental Posture

What separates an effective private investor from one who loses money continuously? The difference is what we call “mental posture”. To be a successful private investor you need to have a good mental posture. But what is mental posture? It is your emotional response to the share market in general – and to your shares in particular. What are you feeling? Because how you are feeling will

S&P Touches Record High

On the 9^th of July 2018 and previously on the 6^th of April 2018 we suggested in articles that the S&P had reached the bottom of its correction at 2581 and found strong support at the level. We also suggested that the strength of that support indicated that the correction

Bitcoin Continues to Unravel

In December last year we ran an article entitled “The Bitcoin Bubble” and there we suggested that the exponential nature of the Bitcoin price was clearly indicative of a bubble and we advised that if you owned them you should sell and if you didn’t you should stay away from them. We published a

The Rand Tanks

The rand has collapsed from R13.38 to the US dollar to levels as low as R15.26 – in less than two days. It has subsequently stabilised at around R14.50. South Africans will naturally think that this has been caused by something that the government has done or that President Ramaphosa has said, but in this case they would be mostly wrong. The current weakness in the rand has been caused by a sudden sharp move from risk-on

Woolies Risk and Gearing

Every investment has risk, because without risk there cannot be an inflation-beating return after tax or any real growth. From a fundamental perspective, risk is usually measured in terms of a company’s gearing – how much debt has it got relative to equity? Or in simpler language - how much money have the shareholders got in the business when compared with what outsiders like banks and creditors have in it. A highly indebted

ArcelorMittal - Buying Opportunity?

The steel industry in South Africa is a very important industry because its production supports so many downstream industries and businesses. For this reason, the government has been sympathetic to ArcelorMittal’s call for tariffs on certain steel products which have been systematically dumped on the South African economy by the Chinese. China is the largest steel manufacturer in the world and has traditionally consumed