Why this might not be a 'sell in May and go away year'
The Dow, the FTSE, the AIM, frogs and the future…
It's not often we get to link frogs with the stockmarket, but we've noticed over the years that when the UK has some decent weather, the stockmarkets tend to prove quite buoyant and interesting. Probably 'cos people feel better and optimistic on sunny days.
A forestry track locally has some deep ruts which invariably fill with water. Very early in February, these ruts were also full of frog spawn, a month earlier than usual. It suggests frogs are expecting the ruts to dry out by end of April, therefore hinting at good weather ahead. It's amazing how often this country bumpkin stuff works out!
Thus, this might not be a "sell in May and go away" year.
Our last Big Picture diatribe about the UK's AIM market (AXX) was December last year where we'd proposed coming growth toward 900 points, maybe even 996 points if everything turned out okay.
The AIM is now trading around 910 points and so, our prediction of a 13% rise has come to fruition. Better still, our initial target level was bettered, and so, despite some near term stutters, our longer term 996 has become a valid obsession.
To slow the immediate upward cycle down, the market needs below 800. And to crush our hope for the future, it needs below 704 points.
Absolutely critical in this recovery of the AIM market will be the day it closes above 970 points as this will point at a future 1,245 points, matching the highs of 2007 and doubtless pretty useful for many AIM market constituents. Hopefully, the frogs know a thing or two...
THE DOW JONES (DOW:DJI)
Last October we produced twin predictions exclusively on Interactive Investor about the DOW and the FTSE and suggested they be printed out and kept.
And in the best traditions of Trends and Targets, we promptly forgot about 'em until a few emails arrived.
Long story short, we'd proposed 20,525 as a major target for the DOW and 7,218 as a major point of interest for the FTSE. At the time, the markets were 18,150 for the DOW and 6,996 for the FTSE.
This is one of these situations where we were proven correct but, from our stance, it's more interesting reviewing what actually happened when our target was achieved.
In the case of the DOW it was quite telling. The index hit our target level and stuttered for a week, then on 21 Feb the market was gapped higher in a clear indication there was a belief a future high note could be hit.
So, where is that high note?
If the DOW now betters 21,125 we calculate further climbs to 21,277 are possible. Then the market must obviously collapse - except it probably will not. The USA has form in simply jumping obstacles by gapping the index up and, thus, above 21,277 now provokes 21,617 points.
The DOW Jones is already trading at levels 'respected' analysts believed impossible, but we're going to stick our neck out and suggest if this index ever actually achieves 21,617 points, then rushing out to open a short with a fairly tight stop might not be the silliest notion. Our reasoning is simple.
The calculation which gives 21,617 is based on the low of March 2009 when the DOW Jones hit 6,470.
While our formula for extrapolating the future proves extraordinarily reliable (most of the time) it simply cannot currently give any number above 21,617 with any confidence.
Essentially, the index requires some volatility to generate oomph for a future beyond such a level. The alternative may also prove true - our program skills may be missing something - an obligatory caveat.
With shares, usually an "ultimate top" number will provoke a period of stutters and false starts, then a droop to (hopefully) bounce against the immediate uptrend. In the case of the DOW, this uptrend is currently at 20,300 points.
Time will tell. Entirely up to the reader whether this is printed out and kept. It's just - currently - above 21,617 will leave us uncomfortably clueless until we figure out where the heck the new trend is!
FTSE for Friday (FTSE:UKX)
Our twice weekly FTSE mutters are proving popular articles this year, something we feel both intimidated and irritated about.
Intimidated, 'cos we're not infallible, irritated 'cos the same level of work is applied to shares covered in the headline section. For instance, our recent 11 shares covered for this year's ISA bundle are collectively up 4.5% in just a few weeks.
Unusually, we remembered to create a specific table for just these shares and shall revisit them a few times as the year progresses.
The FTSE closed Thursday at 7,385, managing to achieve an exceedingly boring day. We'd alarm bells ringing due to the opening spike toward 7,394 as it felt this would enable weakness toward 7,350 - nothing terribly alarming for a Thursday.
Instead, the day proved becalmed, but anything now below 7,374 is expected to visit 7,350 initially. If triggered, stop needs be above 7,387 at its tightest. In fact, this is almost too much of a gift horse as the secondary, if 7,350 breaks, is at 7,338 points.
The market rarely gifts a 36-point drop which only requires a 13-point stop. Maybe all the action will occur at 8am when the FTSE opens?
It's perhaps worth recalling the underlying market pressure remains upward on the FTSE as we started the week proposing 7,425 as a pretty important point of interest.
Near-term, we're forced to change our tune a bit as above 7,395 looks capable of 7,448 points initially with secondary now coming in at 7,566. We're not terribly impressed with the secondary as 7,520 presents itself as a major stutter level in any rise.
None of the above is particularly earth-shaking and the red line on the chart is currently at 7,093.87 points, this being the accurate level of the trend since the Brexit vote thing.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.