Chartists plot worrying course in Dow performance

Key measures show the Dow Jones Industrial Average of bluechip US stocks is displaying a mix of enthusiasm and a rapidly slowing influx of investors after racing up almost 50 per cent from a 12-year low in March.
 

Many global markets follow the Dow as a leading indicator, so a sell-off could trigger a chain reaction around the world.

 

US analyst and hedge fund adviser Jake Bernstein, who has polled small traders’ sentiment daily since 1987, said the level of bullishness among small traders was a powerful leading indicator of market turns.

 

‘‘There’s a close correlation between extreme highs [in small traders’ sentiment] and market tops,’’ he said. ‘‘And small traders are more bullish than at any time since the Dow peaked in late 2007.

 

‘‘We simply ask . . . ‘Are you bullish or are you bearish?’. We then plot the percentage who say they are bullish as he small traders’ sentiment index. About 90 per cent . . . are bullish.’’

 

Mr Bernstein said small traders were as late to buy into bull markets as they were to sell out of bear markets, so extreme peaks and troughs in their sentiment were good leading indicators of tops and bottoms.

 

‘‘The small-trader index tends to lead the market,’’ he said.

 

‘‘Small traders as a group are not always wrong but they do tend to be an early warning sign at tops and bottoms.’’

 

The volume of trading in the 30 stocks of the Dow has been falling for a couple of weeks. The higher prices go, the less buyers are committing their money.

 

‘‘Falling volume is a worrying signal,’’ Mr Bernstein said.

 

‘‘Lower volume is normal at this time of year because of the holiday season [in the US and Europe]. However, this year it comes as many cheap stocks have risen 200, 300 or even 400 per cent from their lows.

 

‘‘Soaring cheap stocks is a sign of a bull run ending. That’s because the small traders who get in late can afford only cheap stocks. Few traders can afford $US450 [$537] for Google or even $US160 for Apple – let alone more than $US100,000 a share for Berkshire Hathaway.’’

 

Analysts who study market structure, such as Australian Professional Technical Analysts Association president David Hunt, warn that the Dow, Australia’s S&P/ASX 200 and other global indices have rallied up hard against resistance.

 

Mr Hunt, who trains investors and traders in market strategies, said the market was topping early, which is a sign of extra weakness.

 

‘‘The internal proportions for a top in the local market were locked in during the past week and they were locked in during the previous week for the US market,’’ he said.

 

‘‘We are overextended. The All Ords is 16 per cent above its 200-day moving average and this is usually a sign of a major top. The tops in 1987, 1989 and 1994 were all established like this.

 

‘‘There’s a 45 per cent chance of a new high in September after a correction down to 4075 but that new high would be another selling point. A close below 4050 will confirm that the next leg of the bear market has begun.

‘‘The Chinese [sharemarket], which doubled in nine months, has already topped. When BHP Billiton closes below $36.80, it will become a basket case.’’