Investing in an artificial world
By Colin Twiggs
August 20, 2016 8:30 p.m. EDT (10:30 a.m. AEST)
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Dow Jones Global Index is in phase 2 of a primary up-trend. Target for the current advance is 340*. Momentum holding above zero indicates trend strength.
* Target calculation: 316 + ( 316 - 292 ) = 340
The S&P 500 continues to layer in a narrow range. The market shows little enthusiasm but there is no sign of selling pressure. Periods of consolidation normally resolve in the direction of the prevailing trend but retreat below 2150 would warn of another retracement to test medium-term support at 2100 to 2130.
* Target calculation: 2100 + ( 2100 - 1800 ) = 2400
The Dow Jones Industrial Average is also consolidating above support at 18300. Follow-through above 18600 would indicate an advance to the medium-term target of 19000*.
* Target medium-term: 18500 + ( 18500 - 18000 ) = 19000; Long-term: 18000 + ( 18000 - 16000 ) = 20000
The Financial Stress Index from the St Louis Fed continues to flag low levels of stress in financial markets. Values above zero indicate elevated stress.
Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index© [STLFSI], retrieved from FRED, Federal Reserve Bank of St. Louis
But we are living in a highly artificial world, with record low interest rates driving a scramble for yield.
And the scramble for yield is distorting asset prices. Bonds are the most obvious example but many listed property vehicles are trading at substantial premiums to underlying net asset value. And stocks are not immune, with the Price-Earnings ratio for Defensives making new highs.
Compare the fwd PE of "defensives" today vs. 1999. Doesn't look like exuberance. pic.twitter.com/W3Q5ZOxWB0â€” Joe Weisenthal (@TheStalwart) August 14, 2016
So although financial stress is low, we need to be careful not to pay too high a price.
Germany's DAX is retracing to test new support at 10500. Respect would confirm the primary up-trend.
* Target calculation: 10500 + ( 10500 - 9500 ) = 11500
The Footsie is slowing as it approaches heavy resistance at 7000/7100*. Correction towards 6500 would establish a new base for further advances.
* Target calculation: 6500 + ( 6500 - 5900 ) = 7100
The Shanghai Composite Index is testing resistance at 3100. Breakout would signal a primary up-trend. Recovery of Momentum above zero is a bullish sign.
The ASX 200 is consolidating in a narrow range between 5500 and 5600. Reversal below 5500 would warn of another test of the lower trend channel.
* Target calculation: 5400 + ( 5400 - 5100 ) = 5700
There is still a question over Australian banks' capital adequacy and exposure to housing. But the ASX 300 (not "ASX 30") Banks Index continues to build a base between 7200 and 8000. Breakout would signal a primary up-trend.
I should therefore prefer to restrict my guidelines to the following:
- Don't believe that military interventions, no matter how morally justified, can succeed without clear military goals
- Don't fall into the trap of imagining that the West can remake societies
- Don't take public opinion for granted â€” but don't either underrate the degree to which good people will endure sacrifices for a worthwhile cause
- Don't allow tyrants and aggressors to get away with it
- And when you fight â€” fight to win.
~ Margaret Thatcher, Statecraft: Strategies for a Changing World (2002)