INSIGHTS

On August 21, 2017

AAM Viewpoints – Traditional Technical Tools Portend Higher Levels for Stocks

I have remarked for years that this bull market cycle is unlike any I have studied in my 43-year career in technical analysis and portfolio management. My conviction is based, in part, on the broad and diverse lineup of sector leaders that has prevailed through this cycle. Of course, there are other positive technical attributes that remain as stout today as they were years ago and thousands of DJIA points lower. This is not a bull market that requires a redrafting of traditional technical analysis. Rather, adherence to the basic tenets of our analysis that have been applicable for many decades provide unwavering insight as to its underlying potential. From a technical perspective, price architecture, net money flow (a modern-day distillation of ticker-tape reading) and relative strength are bullishly aligned and independently confirm a powerful uptrend. With respect to price architecture, the quality of the patterns among many stocks representing the market’s core leadership is unprecedented. Formidable cup-and-handle formations have continuously regenerated over the span of this cycle and these patterns historically depict a well-established uptrend that reflects durability, elasticity and longevity. They are the culmination of forward strides met with regular backing and filling exercises that address short-term price and sentiment excesses. The market’s gains have been well-tempered with negligible speculative buying.

Net money flow trends reveal widespread accumulation trends that indicate investors are increasingly confident about forward economic growth. While some well-known investors bet against the market following last November’s election outcome, the market maintained a clearly defined uptrend that speaks to a historical market truth: stocks are not basically driven by political bias or rhetoric, but are guided instead by investors’ perceptions about the outlook for earnings and interest rates. Net money flow trends reflect investors’ conviction that earnings will continue to grow and that the Federal Reserve’s monetary policy may not interfere with economic growth anytime soon.

Finally, relative strength based on the populations of attractive individual stocks representing leading industry categories remains very good. This is not a bull market that depends upon a mere handful of individual stocks or sectors. It is far from a micro-themed market. Instead, I find that there is a remarkably deep roster of stocks propelling the market’s leading themes. The prevailing attractive breadth of industry representation in this cycle is further complemented and reinforced by the balanced participation of large, medium and small capitalization stocks.

What is missing today is a heightened urgency to participate in this record-setting investment environment. There is no euphoria, no concentrated buying, no micro-thematic focus. Valuations are reasonably in line and I believe some of the best days for this uniquely bullish market cycle lie ahead – if past market cycles with their final stage frenetic buying is any indication. I am maintaining my upwardly revised ultimate target of DJIA 27,500.

CRN: 2017-0807-6083 R

Opinions in this piece are those of Peroni Portfolio Advisors and are not necessarily that of AAM.