Is Stock Market Rally "Real"?

By: Prieur du Plessis | Fri, Nov 14, 2008
Print Email

What a wild day on stock markets yesterday! At one stage the Dow Jones Industrial Average plunged to below 8,000 to a five-year intraday low, but staged a spectacular rally late in the session to close 553 points (6.6%) up on the day. The S&P 500 Index moved in tandem to finish the day 59 points (6.9%) higher.

I referred to the characteristics of the so-called descending triangle on the S&P 500 in a post of two days ago ("Stock Markets: Which Way José?"), mentioning that a reversal to the upside often leads to a strong countertrend rally. A move in that direction occurred yesterday on the highest volume in a month. Although one shouldn't get too fired up about a one-day turnaround, the price and volume action was quite impressive, with the October 27 lows (8,176 on the Dow and 849 on the S&P 500) still intact.

The following daily graph summarizes the market action:

Importantly, the intraday lows of October 10, when the NYSE (red line in the graph below) made an "internal low" with 92.7% of stocks hitting new lows (blue area), have also not yet been violated.

A further positive for the bulls is that, according to Jeffrey Hirsch (Stock Trader's Almanac), the Dow has been up 12 out of the last 14 years during the week before Thanksgiving.

With the likelihood of further short-term gains a possibility (especially if the major indices record upside reversals on the weekly data by the end of today), it remains too early to tell whether a secular low has been recorded. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (blue line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1991, 1994, 2000 to 2003, and again since December 2007.

Stock markets are caught between the actions of central banks, governments and the IMF frantically fending off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. This situation has a "no-man's-land" feel to it. By all means try to play a possible nascent rally, but be cognizant that, failing further technical and fundamental evidence, you are trading against the primary trend. Caution is still warranted!

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.



Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

Copyright © 2008-2012 Dr Prieur du Plessis

All Images, XHTML Renderings, and Source Code Copyright ©