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

Correction

The progress of the S&P500 index of the 500 largest companies on Wall Street is important because stock markets around the world, including the JSE, tend to follow it sooner or later.

On 19^th January this year, something momentous happened when the S&P broke above its previous all-time record high

Shoprite

In their article on 10^th April 2024, Checkers sweeps Pick n Pay as it opens 5 new stores in one day., Businesstech drew attention to the fact that Shoprite had taken over five stores from Pick ‘n Pay on the East Rand. Pick

WeBuyCars

In a few days’ time, Transaction Capital (TCP) will unbundle and separately list its second-hand car sales company, WeBuyCars (WBC). The main benefit of this is to release the value of WBC into the hands of its shareholders. When the listing is complete, on 11^th April 2024, WBC will have a total of 417,2m shares in issue which are expected to

Gold and Harmony

In our last Confidential Report, published on 6^th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4^th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high