A long-term look at equities – is the bull market back?

With the S&P 500 back at all-time highs, the FTSE 100 hitting levels not seen since last summer and the DAX having finally broken its April 2015 downtrend, the question is now whether the shorts have had their day? 

US traders
Source: Bloomberg

Earlier this year we highlighted the possibility that the S&P 500, having been rangebound since mid-2014, was stuck in a box formation that was last seen in the 2006-2008 period, and ended in the Great Crash of 2008. That box has been broken, but not to the downside. Even when we talked about it, price action was showing remarkable resilience. Once again the S&P 500 has tempted in a barrage of short positions, before turning around and moving higher:

Let’s turn to the FTSE 100, which endured a difficult year from c. April 2015 until February 2016. On the daily chart, rallies were firmly sold in this period, but on the monthly chart a different story was seen.

A number of months saw big drops, but then finished well off their lows; from August until February, the 6000 level was defended with particular vigour, with no month finishing below this level, despite multiple attempts:

Finally, we look at the DAX. Despite regular monthly injections of QE, the index took a beating from April 2015 onwards, falling from a high well above 12,000 to a low not seen since October 2014, below 9000. And yet it too has recovered, with the 9000 level doing the same job that 6000 did for the FTSE 100:

Fans of trendlines (of which I count myself one) will have been pleased to see August 2016 end the downtrend from above 12,000, with the line broken and a strong move higher:

At this point, it is necessary to point out the host of problems that confront the global economy, including Brexit, a slow (or non-existent) eurozone recovery, the possibility of a severe tightening cycle in the US, a still struggling Chinese economy, and (once again) falling oil prices. Yet the shift to more QE by the Bank of England underlines the key point – global monetary policy remains fundamentally accommodative, and despite record levels of cash balances among fund managers, investors looking for yield still have to buy equities.

In my opinion, now would perhaps be one of the least propitious times to short equities in a number of years. The reaction to Brexit was a clear indication that investors are still prepared to buy, especially in those sectors will compelling earnings outlooks and strong records for dividends. Despite worries about the Federal Reserve, rising employment in the US is good news for US corporations and stock prices. After a year or more of declines, perhaps we are seeing a return to ‘buy the dip’ as the norm for equities.

This thesis should be tested thoroughly before the end of the year. Some kind of crisis is bound to materialise, and only then will we see how markets react. Yet I would not be surprised to see the dip assiduously bought, with a grind higher continuing. Valuations may be stretched, and risks remain, but the ‘path of least resistance’ for stock markets appears to be upwards, and it would be unwise to argue with stock markets backed by the power of global central banks. 

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