The volatility and the sharp falls in the major US indices do not augur well for global stock markets. For those who have not been following the stock market, various reasons have been cited for the correction: Sino-US trade war, Trump’s folly, fear of aggressive rate hikes and a slowing global economy.
We have seen how Apple Inc. killed the US market with its poor 1Q19 guidance. The smartphone maker was quick to blame the China market for its poor performance but what I really feel is that Apple’s strategy of selling overpriced phones while losing market share to its competitors were the main reasons for the share-price plunge.
If investors continue to bargain hunt thinking that valuations are cheap, a combination of the abovementioned factors could easily hit 2019 earnings henceforth causing valuations to rise and stock prices to dip even further. Classic example – Apple and Tencent!
We shall not delve into excessive fundamentals, as I wish to warn investors – from a chartist’s point of view – that it may be the last chance to exit the stock markets before the bears take over.
US DJIA 10-Year Chart
During the course of the last 10 years, there were four sell signals that appeared on the US DJIA chart – once in 2008 (global financial crisis), 2011 (European debt crisis), 2015 and the latest being December 2018. Each signal triggered falls ranging from 14 percent to as much as 50 percent so unless a miracle happens, and we know that miracles rarely happen, then we are in for another long winter in the US stock markets.
Each time the sell signal appears, it would take some time between six months to more than a year for the buy signal to be triggered. The recent appearance of the sell signal in December 2018 will probably mean that we will see the US markets sliding till June at the earliest.
Nasdaq Composite 10-Year Chart
While the frequency between the buy and sell signals appearing on the Nasdaq Composite charts were shorter than that of the DJIA, each sell signal meant rather significant falls. It will be foolhardy not to take heed of these signals.
At current levels, the Nasdaq Composite has already lost some 20 percent of its value from its peak. This means that it has reached the technical bear market level that opens up the index to even more losses.
S&P 500 10-Year Chart
Similarly, the S&P 500 has displayed similar strengths and weaknesses in tandem with the DJIA and the Nasdaq Composite. While some may say that each bull and bear markets have occurred from different reasons, these reasons are merely “trading noises” to technical analysts as this group of people believe that the technical indicators and signals are triggered as a result of price actions – the decision-making process and actions taken by market participants that affect the share prices.
What About The Future?
Let us not pretend to know the future because predictions can go awry. I have not been active in the stock market for quite a while because sell signals appeared on Asian bourses way back in May-June of 2018. I believe that some traders did not exit the Asian markets much earlier because the US stock markets kept the hopes alive; Trump gave investors lots of hope or false hope.
The DJIA traded as high as 26,951 on 3 October 2018 but went as low as 21,712 on Boxing Day before the colossal intraday 1,000-point rally dragged the index out of the rut. Based on the trading high of 26,951 on 3 October and the low of 21,712 on Boxing Day, the index would have lost 5,239 points or 19.4 percent. Not yet a bear market but very close. Just a whisker away. Looking at the closing value of 22,686 on 3 January, there is some cushion between now and bear market. If the DJIA were to lose 1,000 points from now on, breaking the support of 21,712, then a bear market beckons.
For the S&P 500, it looks like retesting 2,350 is a possibility in the near term unless a strong rally can push the index above 2,520. Cautiously optimistic? No, I am not hopeful! At its closing high of 2,929 on 21 September, the index has already shed some 500 points based on 3 January’s closing value of 2,447. But let us not forget that it traded as low as 2,346 on Boxing Day. From 2,929 to 2,447 is a loss of 16.4 percent but if we were to take into account the closing value of 2,346, then the S&P 500 would have fallen into bear market territory by losing 20 percent. A breach is still a breach no matter how we argue. We are facing further losses.
As for Nasdaq Composite, its is officially in bear market territory no matter which parameters we use i.e. closing high, intraday high etc. We can only for a sudden piece of very, very good news to alter the charts and the direction of the US stock market.
I will be updating on the Asian markets after I have called for a bear much earlier last year. Stay tuned and watch this space at www.sharesinv.com next week!
Gabriel Gan was a Senior Vice President at AmFraser Securities. He left to join DMG Securities (now renamed as RHB Securities) to take on a similar role. During his stints at the stockbroking firms, he dealt in equities, performed advisory role and executed corporate finance deals for his clients.
Since 2001, he has been invited by the media (both Mediacorp and SPH) for his stock market opinions. On radio, he spoke on 95.8FM for more than a decade; he now speaks every Wednesday and Thursday mornings on SPH radio 96.3 FM, delivering his opinion in Mandarin. On TV, Gabriel appeared on Channel NewAsia, the former Channel U and various Channel 8 financial segments including Good Morning Singapore, Hello Singapore and MoneyWeek. On print media, he continues to give quotes and comments on the economy and stock market for Lianhe Zaobao, Lianhe Wanbao and Shinmin Daily. On top of that, Gabriel was a columnist for the now defunct My Paper.