US stock market bullish but divergence and valuation are concerns
On 4 March, the Dow Jones Industrial Average hit 10,940.55, its highest close since June 2001, while the Standard & Poor's 500 index hit 1,222.12, its highest since July 2001. The US bull market in equities lives on.
However, some people are nervous.
In a commentary on 1 March for MarketWatch entitled "Testing three-year highs on narrow leadership", Michael Ashbaugh pointed out that while "the S&P and the Dow challenge three-year highs, the Nasdaq isn't even testing two-week highs".
Ashbaugh went on to point out that "the recent Dow and S&P strength comes not only in the face of a weak Nasdaq, but a weakening Nasdaq. Each test of the S&P's three-year highs has been matched by a successively lower level on the Nasdaq".
And although the Dow and S&P went on to make three-and-a-half-year highs on 4 March, the Nasdaq, which closed at 2,070.61, remains almost 5 percent below its high in December 2004.
Ashbaugh explains that the Dow and S&P have actually been propped up by the energy sector. That is why the Nasdaq has not participated. In other words, the recent strength in the market is actually narrowly-based.
Ashbaugh said that in "a perfect world, you would look for more broad-based participation to drive a sustainable move to multi-year highs". Divergence among indices is often a bearish indicator.
At least that is what the Dow Theory claims. The Dow Theory, though, focuses on the relationship between the Dow industrials (as represented by the Dow Jones Industrial Average) and the Dow transports (as represented by the Dow Jones Transport Average).
According to the theory, a bull market is confirmed when both sectors reach significant new highs, while a bear market is signalled when both averages reach significant new lows. Market turning points occur when the two averages trend in opposite directions or diverge.
In a commentary for MarketWatch on 4 March entitled "Dow Theorists smile after Friday rally", Mark Hulbert makes the observation that "Friday's rally was even stronger for the DJTA than for the DJIA, and now both averages are above their late-December levels". No divergence there.
Does this mean that Dow theorists are bullish? According to Hulbert, yes -- at least for the short term. Hulbert makes one caveat: Richard Russell, editor of the Dow Theory Letters, remains bearish for the longer term.
"That's because," Hulbert explained, "by his reading, the original Dow Theorists placed even more weight on valuations than they did on joint new highs among the primary Dow averages. And because the market remains overvalued according to any of a number of fundamental criteria, Russell believes that any bull market we are seeing now comes within the context of a secular bear market that will eventually take the market down to much lower levels."
And Warren Buffett apparently agrees that the market is overvalued. In his latest annual report for Berkshire Hathaway, the billionaire investor said he ended the year with "$43 billion of cash equivalents, not a happy position".
"My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have," Buffett explained. "But I struck out. Additionally, I found very few attractive securities to buy."
That did not stop Berkshire Hathaway from raising its per-share book value by 10.5 percent, close to the 10.9 percent rise in the S&P 500.
Nevertheless, if the great investor has problems identifying good stocks to buy, more ordinary investors would be well-advised to take another look at their holdings or candidates for purchase.
In any case, getting back to the Dow Theory -- which was formulated long before Nasdaq came into being -- one could reasonably ask whether the DJTA is more relevant than the Nasdaq in today's market. And that would of course throw open again the question of whether there is a divergence within the market that is signalling an impending reversal.
The bull market may still be alive, but for how much longer remains an intriguing question.
However, some people are nervous.
In a commentary on 1 March for MarketWatch entitled "Testing three-year highs on narrow leadership", Michael Ashbaugh pointed out that while "the S&P and the Dow challenge three-year highs, the Nasdaq isn't even testing two-week highs".
Ashbaugh went on to point out that "the recent Dow and S&P strength comes not only in the face of a weak Nasdaq, but a weakening Nasdaq. Each test of the S&P's three-year highs has been matched by a successively lower level on the Nasdaq".
And although the Dow and S&P went on to make three-and-a-half-year highs on 4 March, the Nasdaq, which closed at 2,070.61, remains almost 5 percent below its high in December 2004.
Ashbaugh explains that the Dow and S&P have actually been propped up by the energy sector. That is why the Nasdaq has not participated. In other words, the recent strength in the market is actually narrowly-based.
Ashbaugh said that in "a perfect world, you would look for more broad-based participation to drive a sustainable move to multi-year highs". Divergence among indices is often a bearish indicator.
At least that is what the Dow Theory claims. The Dow Theory, though, focuses on the relationship between the Dow industrials (as represented by the Dow Jones Industrial Average) and the Dow transports (as represented by the Dow Jones Transport Average).
According to the theory, a bull market is confirmed when both sectors reach significant new highs, while a bear market is signalled when both averages reach significant new lows. Market turning points occur when the two averages trend in opposite directions or diverge.
In a commentary for MarketWatch on 4 March entitled "Dow Theorists smile after Friday rally", Mark Hulbert makes the observation that "Friday's rally was even stronger for the DJTA than for the DJIA, and now both averages are above their late-December levels". No divergence there.
Does this mean that Dow theorists are bullish? According to Hulbert, yes -- at least for the short term. Hulbert makes one caveat: Richard Russell, editor of the Dow Theory Letters, remains bearish for the longer term.
"That's because," Hulbert explained, "by his reading, the original Dow Theorists placed even more weight on valuations than they did on joint new highs among the primary Dow averages. And because the market remains overvalued according to any of a number of fundamental criteria, Russell believes that any bull market we are seeing now comes within the context of a secular bear market that will eventually take the market down to much lower levels."
And Warren Buffett apparently agrees that the market is overvalued. In his latest annual report for Berkshire Hathaway, the billionaire investor said he ended the year with "$43 billion of cash equivalents, not a happy position".
"My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have," Buffett explained. "But I struck out. Additionally, I found very few attractive securities to buy."
That did not stop Berkshire Hathaway from raising its per-share book value by 10.5 percent, close to the 10.9 percent rise in the S&P 500.
Nevertheless, if the great investor has problems identifying good stocks to buy, more ordinary investors would be well-advised to take another look at their holdings or candidates for purchase.
In any case, getting back to the Dow Theory -- which was formulated long before Nasdaq came into being -- one could reasonably ask whether the DJTA is more relevant than the Nasdaq in today's market. And that would of course throw open again the question of whether there is a divergence within the market that is signalling an impending reversal.
The bull market may still be alive, but for how much longer remains an intriguing question.
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