INSIGHTS

On October 08, 2018

AAM Viewpoints – As the Bull Market Cycle Continues…

Early this year I upwardly revised my target for the Dow Jones Industrial Average (DJIA) to 33,000 which was at least the third such revision in as many years. These forecasts were formulated with both top-down and bottom-up studies and were based, in part, on the historical price movements of the DJIA with focus on the market’s post-2008 trading momentum. It is important to note that while I concentrated on the chart patterns of the past 10 years, the basis of my bullish forecast is rooted in the assumption that the prevailing cycle began in late 2002. This provides constructive price architecture extending 16 years rather than the 9.5 years that would be the case if we assumed an entirely new and distinct bull market emerged after the financial crisis. The timeline is important in my analysis since the structure of this unprecedented advance is substantially more formidable. It potentially enhances the springboard effect with the added years of proven durability and elasticity.

My target is also based on the longer-term technical outlooks of the DJIA’s 30 individual component stocks. On this basis, it may be noteworthy that I anticipate that less than half of the blue-chip components will be the principal drivers in attaining my end-of-cycle objective. The quality of price architecture is also a determinant. In this regard, we continue to observe numerous classic cup-and-handle formations that have historically implied durability, resiliency and longevity of a trend. Net money flow patterns that serve as a good gauge of investor conviction have also been considered. Comparing longer term support currently near 25,000 with my ultimate upside target of 33,000, presents a perspective of the risk/reward ratio for the equity market, which, in my opinion, remains attractive as the DJIA closes in on 27,000.

While the DJIA may not be the timeliest index to cite as growth has overtaken value in these advanced stages of the bull market cycle, it is relevant since it is climbing to new record highs along with the S&P 500, Russell 3000 and NASDAQ. There may not be as much of a flight to safety as there was earlier in the cycle with investors increasingly willing to accept more risk for more reward, which typically highlights earnings leveraged opportunities. Nonetheless, there are no decisive patterns of concentrated buying in a micro theme or singular capitalization tier. This suggests that while the market may be overdue for a correction it is not likely at risk of a major and sustained decline. Our equity growth model continues to reflect balanced relative strength in a broad range of sectors. Such a profile does not indicate that we are anywhere near an ultimate peak for the stock market.

CRN: 2018-1002-6924 R

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