Still tracking the DJIA - "..Sky's the limit?"

10 days have passed since I called for a turn (The T'ursday Turn). While markets continue to gyrate precipitously, a really obvious and impacting downward pressure has yet to appear. 

From a technical point of view, it is easy to see that the recent parabolic upward moves will lead to exhaustion soon.  We might also argue that we are hitting major resistance levels in many indices. Imagine prices a bit like delirious, helium-filled balloons soaring up to the ceiling. Where is the ceiling? Will it cause balloons to burst? No, but they will sort "bounce off", only to float up hitting the ceiling again.  It would take a fast moving fan or a sharp object in the path of the balloon to end the fairy tale advance. 

Away from the metaphors:

How is the DJIA doing?

 The 10,800 level has long been my sweet spot from which to start positioning against a further rise in the DOW JONES. The one-day wonder last Friday (23 September) with stocks in the US rising an average of 2% seem to push through this barrier.  In mentioning the 10800 level as casually as this, you must realise that it is only an environ figure, indicating a level when markets will experience congestion in a pronounced way.

While it seemed inconceivable even to me to reach this level when the index was close to 10000 a few short weeks ago, it is surely as daring and controversial to now point into the opposite direction and expect the index to break down and through the 10,000 once again in the coming weeks.  

Before it does, I give these balloons a few more "bopping days", luring ever more risk averse investor into the fray.  Indeed, the actual CEILING to which balloons may rise now is a few points below the 10,900 level, - less than a percentage point away. I have indicated the level with a blue horizontal line: it is set at the same high we had in early May this year. The next one above that - and the ultimate high for this move to finish on would be 11,200, the April high of this year. THIS IS A SETUP of classic proportions: Once the strong hands (staying in this rally certainly requires strong hands) start offloading their shares to the weak hands we will see a dramatic decline. And it should happen fairly soon. Of course, there is something counterproductive when everyone "knows" what's supposed to be next. We may feel a giddy lightheadedness, fooling even more with the slogan that "this time it's different".

Is that the reality that we, Singapore Dollar Investors, should be looking at?

Did you notice the changes in the currency exchange between USD and SGD? How about the SGD-version of the DJIA? This is yesterday's chart for the USD/SGD ratio from Google Finance. Since then, the SGD has strengthened even further.

In the last 30 days, the USD is down by -3% against the SGD. In order to justify investing your "SingDollar" into US indices for that period, we would need to see the DOW JONES exceed its previous high in August by 3%, too.  

Here is a graph I prepared, comparing MSCI World, MSCI AsiaPac and the DOW JONES, with the simple SGD-USD graoh. The rise of the SGD against the greenback is 3.7% since early August. When viewed over this period  (exit for equities), we can see that switching to safety resulted in achieving the SAME SHORT TERM RETURNS as those investors who remained invested in equity. And we did not suffer the heartache of seeing valuations drop more than -6% half-way through.


Taking the decision to take profit in a timely manner is part of a proper strategy and requires investors to remain aware of the overall picture in the context of their personal investment objectives. I always adhere to one principle, first and foremost: - The risk-reward spread must always be a beneficial and profitable one. In markets like these a clear-cut decision is more difficult than usual and it depends a little on how "desperate" you are in squeezing the last bit of return out of what I term 'unprofitable markets'.  

FINALLY - any alternative scenarios on the cards?

If equity markets do break through the highs in May, or indeed the higher April peaks, then a seriously bullish picture may arise.  It remains an option - and I am happy to bide my time.  I predicted an Indian Summer, and markets chose my hot version.  The ultimate turning window is envisaged for the second week of October.  Put it in your diary.


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