Many investors continue to fear a stock market top after the explosive rallies in recent years. Are U.S. stocks nearing extreme evaluations that can lead to a market top?
We turn to our monthly and yearly charts for market insights. They are full of relevant data. However, they are not utilized enough by traders and investors, who have favored the shorter-term charts. It is a mistake to ignore the technical signals from the longer-term charts.
A brief review of the 100-year monthly chart of the Dow Jones Industrial Average (INDU – 35,405.24) reveals four (4) interesting long-term uptrends.
From the depths of the 1932 market bottom (41.22) to the peak in 1966 (995.15), INDU rallied more than 23-fold. Investors buying stocks at the stock market peak in 1966 struggled with 16-years of sideways trading. Investors blamed the Nifty-50 bubble and the stagflation cycle for the challenging stock market environment. However, in hindsight, the blue internal trendline warned of an overvalued market vulnerable for a prolonged period of decline. A technical breakout soon after the double-dip recession in 1980-1982 led to a new structural bull. The straight-line up move in stocks was unprecedented as it created another bubble coinciding with the Tech/Telecom dot.com in 2000. After the bubble burst, INDU suffered another 13-years of volatile sideways trading before breaking out during 2013. The subsequent rally from the Mar 2009 market bottom (6,649.95) has been most impressive. Many of the bears are predicting yet another bubble burst.
Calling a market top is incredibly difficult. When euphoria and momentum take hold of the market, it can be hard to step back and see that the market is vulnerable. The first sign of an impending stock market peak is the loss in market breadth. Advancing minus declining issues tend to contract. The number of stocks trading at their 52-week highs also begin to fall. A new lower-high and a lower-lower price pattern further warns at the primary uptrend reversing.
Based on the 100-year chart of INDU, the top of the uptrend, denoted by the green dash line, is currently trending near 36,000. INDU briefly traded to a record high at 36,952.65 (1/5/22) before quickly reversing direction via a negative outside day. The action ignited the recent correction of 3,802.32 points or -10.29%. The second uptrend corresponding to the 100-year internal trend (blue dash line) resides near 20,900, potential crucial support under intense selling. A third trendline coinciding with the gold dash line rises at 14,050. The bottom of the 100-year uptrend channel or the red-dash line is 7,705.
Although INDU has declined 3.32% to start the new year, the strong rallies over the past three years of 18.73% in 2021, 7.25% in 2020, and 22.34% in 2019 have quickly pushed the Dow Jones Industrial Average toward the upper end of its 100-year uptrend channel. That does not necessarily mean an impending market top or the start of a structural bear decline. It simply indicates the Dow Jones Individual has reached the upper end of its upside potential for now. It does, however, suggest INDU may be vulnerable to another correction (10%), a deep correction (10-20%), or a cyclical bear decline (20%-plus) if market internals continues to deteriorate.
Investors need to monitor the stock market carefully, watching for continued divergences in technical indicators such as contracting market breadth, declining new 52-week highs, rolling of key moving averages (50-day, 10-week, 10-month, 200-day, 30-week, and 30-month), trendline reversals, and other technical warning signs. All of which can have profound implications on the Dow Jones Industrial Average and U.S. stocks.