Key Reversals on Stock Markets Point to Pullback
Stock markets on Friday plunged from their 19-month peaks on the back of the SEC charging Goldman Sachs with fraud related to subprime-related products. Although the Goldman news served as the trigger, the equity rally has been flashing signs of being overbought, overbullish and overvalued after six consecutive weeks of gains in the case of the MSCI World Index.
In the run-up to Friday, the S&P 500 Index recorded the largest number of consecutive days above its 10-day moving average since the start of records in 1957. As a 10-day period is very short, this means we have been in the sharpest upmove in decades, remarked The Golden Surveyor.
Also, as highlighted by Bespoke, over the past two months 73% of the trading days for the S&P 500 have been up days. "Since 1980, there have only been three other periods where such a high reading was reached - 6/1980, 4/1995 and 11/2006. Be sure to remember this trading period, because this kind of action does not happen often," said the report on Thursday.
Most benchmark indices closed on Friday with so-called key reversals on high volumes, indicating that a pullback or consolidation of the recent gains has probably started. As shown before, April/May also often mark the start of a less positive seasonal pattern.
The first levels of support will be the January highs which are also close to the 50-day moving averages (see table below). In the case of the S&P 500, these levels are 1,150 and 1,141 respectively (see chart below table). The table also provides the February lows for the various indices as these must hold in order for the cyclical bull market to remain intact.
Source: StockCharts.com
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
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.
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