Markets

A big sideways movement at a high level

The mood on the stock markets is currently predominantly bullish. That is understandable, after all, you can see rising prices in almost all indices. And it is also reported diligently in the relevant media. But if you take a closer look, you will see that for some time now the upward trend has not been as rapid as from March to June. And as you can read several times here in Börse-Intern, only a relatively small number of stocks can make significant gains.

A question of perspective

The Nasdaq 100 is obviously the clear outperformer. For many, this is beyond question after the insane increase from March to June (+ 63%, see following chart). But is that still the case? Since its interim high on July 13, the technology index has only gained a little more than 1.9% – in one month.

Nasdaq 100 - The rate of increase is slowing

So the upward rally has weakened massively. The S&P 500, for example, performed significantly better, with + 4.7% in the same period.

S&P 500 - stronger than the Nasdaq 100

But this index comes to almost exactly the same performance if one assumes the interim high of June 8th.

S&P 500 - The pace of the price increase is slowing

And a gain of 4.8% in more than two months sounds a lot less exhilarating. The Dow Jones looks even leaner. Since June 8th there has only been a gain of around 2% here.

Dow Jones - The pace of the rise is slowing

And with the DAX, some investors even have to look at a negative performance. Because anyone who entered at the high of June 5th will notice that the DAX is now trading below the level it was then after more than two months.

DAX - the rate of increase is slowing

Only those who succeeded in exiting before the brief sharp setbacks in June and entering again at the low are likely to have achieved significantly higher gains than the indices. But since the correction came very suddenly and in the Dow Jones and S&P 500 it actually took place in just one day, very few traders are likely to have achieved perfect timing.

It is certainly a question of perspective. And as I wrote on Tuesday, you can put it more bullishly if you look at the performance of the indices since the end of June. But this ultimately poor performance of the stock markets only confirms the skeptical tones here in the stock exchange in the past few weeks.

Corrective Prophet

However, one reader accused me of some of my arguments being “very sensational and unhelpful for private investors” been. “You may not be a crash prophet, but you are a corrective prophet“, The reader wrote to me, but with a winking smiley attached.

I do not want to contradict the reader at all here. But with a look at the charts above, imagine what happens if the stock indices now go into a sharp fall correction. Then the profits of the past two months will quickly be completely lost – and even more.

A big sideways movement at a high level

If, for example, the S&P 500 should fall by 15% this time as part of a seasonal autumn correction – which would certainly not be unusual after the increase of almost 55% since March – then it would also fall back to the high of 2018. Again, the chart from the Börse-Intern from Thursday of this week:

S&P 500 - trumpet-like sideways movement since 2018

And readers who have been looking for information from the stock exchange for a long time will perhaps remember that since the price slump at the beginning of 2018 I have repeatedly expressed the expectation of a “large sideways movement at a high level” – see the stock exchange, for example -Internally from February 14, 2018.

With a return to the high of 2018, the S&P 500 would have been trending sideways for more than two years, within this expected large range at a high level. With the Dow Jones, a setback of around 5% is enough.

Dow Jones - trumpet-like sideways movement since 2018

Without a doubt, at the time I was thinking of a not quite as volatile sideways movement, with a significantly lower “overshoot” on the top and bottom. But at least I have written about this overshoot again and again (see for example “US indices: overshooting upwards and downwards”). And now it becomes clear that the sideways movements in the US indices Dow Jones and S&P 500 are trumpets (blue and purple lines). This price pattern has accompanied the charts from the Börse-Intern for quite a while.

Rising yields were also the problem in 2018

And already in the Börse-Intern of February 14, 2019, it was about the fact that the market will be burdened on the one hand with decreasing support from the central banks (rising key interest rates), but on the other hand supported by the progress of the economic recovery (see also the day before yesterday’s Börse-Intern) . And that should then lead to the “great sideways trend at a high level” due to the relatively high valuation of the stock markets.

Of course, interest rates are currently far from high enough to represent serious competition for the stock market. – At the beginning of 2018, a breakout in yields on 10-year government bonds to over 2.70% triggered the price slump on the stock market in my opinion. The rate of return is currently around 0.60%. – And so the stock markets could recover again after a possible autumn correction with the help of a year-end rally into the year 2021. But if the central banks are then forced to scale back their expansionary monetary policy because the economy has reached its pre-crisis level and inflation has reached the central banks’ target, then the stock markets could be burdened again. This is especially true if yields on the bond market have reached a competitive level again by then.

Conclusion

With the day before yesterday and yesterday’s Börse-Intern you have a timetable for the coming months. The markets are therefore likely to continue the extremely volatile movements that have been observed since 2018 and ultimately develop a “large sideways movement at a high level”. So it is only logical that I would advise entry at some point in the event of falling prices and warn against a renewed correction if prices rose sharply.

Unfortunately, sideways movements are generally very difficult to trade. And the current one (which has been running since 2018) is made more difficult by the fact that both the downward and upward movements are setting records. I fear that this tendency will continue to accompany us, thanks to the increasing influence of the central banks. Let’s just hope that things don’t get completely out of hand. Because then the next downward wave could surpass this year’s one – and possibly start the lower lines of the trumpets again. And then they might call me a crash prophet after all. I don’t wanna hope

I wish you good trading success
your
Sven Weisenhaus

(Source: www.stockstreet.de)

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