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How high will the stock market go?

Sat, 26th Oct 2013 Leave a comment

Chart of the FTSE-100 at 25th October 2013The FTSE and the Dow have continued their rise since the US government extended the deadline for a spending agreement to January, but, in the short term, they are looking a bit toppy. This chart of the McClellan Oscillator suggests a peak is due shortly: recently, any value over 60 seems to indicate that the market is due a correction within the next few weeks. This would fit in with my recent predictions. There are plenty of things that could trigger a dip: the shutdown crisis is only postponed rather than solved and the FOMC still looks like it wants to end Quantitative Easing (money printing). With the us government spending $3 for every $2 it raises in taxes, there is clearly a need for significant spending cuts or tax rises, though it is unlikely that the Republicans would accept the latter. Either way, there is potential for growth to be affected and the stock market to take fright.

In the longer term, this chart of the Cyclically Adjusted Price/Earnings ratio also suggests that the US is looking expensive. Any reading over 20 is indicative that the market is high and ripe for a drop, with the current reading of 23.5 well into that category. Although the CAPE went a lot higher in 1929 and 2000 before the subsequent crashes, these instances were exceptional (with extreme mania) and most peaks occurred in the 20 to 25 range. If we look at the most recent peak (in 2008) the CAPE approached 28 and, at current earnings levels, that would put the Dow at around 18,500 (higher, if earnings continue to rise in the meantime). That would equate to the FTSE at over 8000. It is easy to see the indices reaching those levels with continued cheap money flowing into the stock market from QE and ultra-low interest rates, which make it not very worthwhile keeping money in the bank. I think that may be one of the reasons the Fed is keen to end QE; they don’t want to stoke another bubble, but they are finding it difficult to justify turning off the taps with the recovery still not that strong. I suspect this situation may continue awhile yet and another boom and bust be the result.

Debt ceiling crisis over?

Sat, 12th Oct 2013 Leave a comment

Chart of FTSE-100 at 11th October 2013Well, the FTSE hasn’t gone quite as I predicted a couple of weeks ago, but it did hover around the 6450 level for a few days before dipping below. It is now rebounding after the Republicans offered to do a deal on the debt ceiling and has reached the twenty day moving average. It may pause here briefly before making further gains, possibly reaching 6800, but I still think it unlikely that it will break out of its 6000-6800 range yet. Even if the president accepts the deal, there is still QE taper talk to keep a lid on gains. Realistically, the PotUS has to agree to the Republicans’ offer as they have backed down on Obamacare and have manoeuvred him to where he would be responsible for the default if no deal is done. That deal is only temporary though, to allow for negotiations on more general spending cuts to the budget, which will also give stock markets reason for some trepidation.

A few weeks ago I forecast the FTSE to return to 6000 in a couple of months, but it looks like that will be put off until the new year. Hopefully, by then, the US budget will be sorted out and the focus will be back on the taper, which everyone has forgotten about for now. Some commentators have been talking about a one-off reduction in QE which doesn’t progress, but the last FOMC minutes still indicated that the Fed wants start the taper this year and to reduce QE to zero next. That would give the stock market plenty to get the jitters about.

Are markets being too optimistic about default?

Sat, 5th Oct 2013 Leave a comment

Chart of Dow Jones at 4th October 2013After reading this article on the WSJ MarketWatch website, I am beginning to think that the chances of a US government default are a lot higher than the market seems to think. When it comes to a Tea Party which is used to getting its way over spending cuts, and the president, who is determined not to give up on his flagship healthcare policy, it seems to me that there is considerable scope for neither side to blink. The stock market still hasn’t really reacted to the shutdown and seems to be completely ignoring the debt ceiling. Shutdowns have happened in the past and don’t normally have any lasting ill-effects, but for the US government to default on the interest and repayments of its bonds would be unprecedented. This is what would happen though, if there is no agreement on raising the debt ceiling, and it would cause a major market upheaval.

It will be interesting to see how jittery the market gets in the run-up to the October 17th deadline. If it doesn’t particularly, then I think we could be in for a sharp downturn.

Categories: Stock Market, Tea Party