Don't look now, but Tuesday marks the 17th anniversary of the Dow Jones Industrial Average first hitting 10,000. Most investors are well aware of when this important psychological barrier was first reached, but likely are scratching their heads as to why the DJIA hasn't been able to replicate this success, doubling to 20,000, despite having traded above 10,000 since the beginning of the 21st century.
Historically, this length of time is not radically different from what we've seen during past cycles. The DJIA first reached 1,000 back in 1966, which produced a top that lasted largely until the early '80s, about 15 years later. In fact, our initial brush with 100 on the DJIA occurred on Jan. 12, 1906, and it took nearly 22 years to reach 200, and then about another quarter-century to double again, at 400 in late December 1954.
So what does 10,000 mean now? And when can we expect to reach our next significant milestone, Dow 20,000? Despite the upward trajectory since 2009, indices largely stalled out over a year ago and have made scant progress. While indices remain within a fractional distance of all-time-high territory, the underlying deterioration has affected most stocks in a much more dramatic and negative fashion. Just within the last two months, we have seen more than 60% of stocks trading down more than 20% from their 52-week highs, yet the DJIA never declined more than 3,000 points from all-time-high territory, or 16% at its greatest span between highs and lows from last spring.
At present, the Dow lies within 5% of all-time-high territory again, but there remain troubling technical signs that the damage caused by our correction last August and in January/February might have some long-lasting effects that could produce further volatility.
The following are negatives to consider:
-- The rally since 2009 represents one of the longest in history without a 20% correction (behind long bull runs from the 1990s and '50s) and typically, peaking out of a six-year-plus bull run tends to end badly, with indices dropping 30% to 50% before recovering.
-- Second, momentum is negatively sloped on monthly charts, as some of the traditional technical indicators like MACD or RSI dropped to new yearly lows last August.
-- Third, long-term trendlines were broken on a logarithmic basis in the S&P 500 along with the MSCI World Index, suggesting that we've seen a real change in trend. Even if prices can manage to push back to new highs, the strength of the price move likely will not be able to help carry momentum back to new highs, suggesting that rallies should be used for profit-taking.
-- Fourth, the high-yield market remains tenuous, and while we've seen a recovery in West Texas Intermediate crude and high-yield markets of late, Barclays High Yield Bond ETF (JNK) has reached areas of resistance in the short run and its decline tends to lead equities lower based on historical correlation.
However, a number of bullish arguments support further rallies between now and early summer:
-- First, the deterioration in the benchmark indices (not broader stocks) has been minimal. Indices now lie within 5% of highs, despite the selective leadership, and the two drawdowns since last summer look very mild from a traditional chart-reading perspective to make too much of the pattern to suggest the trend has truly changed.
-- Second, breadth has shown some severe upside positive thrust in the last few months, and many indicators of momentum and breadth have hit the highest levels since early 2009 directly following quantitative easing. Typically, this is very positive, and suggests that the rally has some additional upside.
-- Third, sentiment remains subdued. Factors like poor earnings, slow growth, Fed uncertainty, geopolitical concerns, the U.S. election uncertainty and the fear of a rising U.S. dollar have kept people on the sidelines in the last few months, as opposed to buying dips, and few have captured the 13% rally off the lows from mid-February. Indicators show sentiment not to be near the levels where any sort of serious top should occur.
-- Fourth, we've begun to see some broadening in the sector movement, as might be expected with many breadth indicators surging to new yearly highs. The utilities and materials move has been joined by industrials, technology and, to a lesser extent, consumer discretionary, with health care seeming promising.
In summary, technically I think it's likely that indices move back to new highs by late spring/early summer and take on a normal pattern of seasonality in 2016. This should call for a rally to new highs, a peak in late spring or summer, followed by a decline into lows in September/October before turning higher in the fourth quarter.
Yet, given the broader deterioration present in most stocks, which haven't completely recovered, it's safe to bet that a larger peak looks to be occurring in the market, which began last year and could result in our long-awaited 30%-50% decline over the next couple of years. If this 16- to 18-year cycle plays out like we've seen over the last 100 years, the period from 2000-18 would suggest we should be near the end of our cycle, which largely mimicked the period from 1929-47, or 1966-82. However, this doesn't preclude a large downward swing that normally comes after extended bull runs during these cycles before the new bull emerges.
For now, the bullish factors seem to outweigh the bearish factors for the next few months, but if this thinking is true, rallies back to new highs should be used for profit-taking for our long-awaited bear market to come out of hibernation again.