Market Overview

The Trend Is Your Friend


by Joel Elconin,

While the mainstream media focuses on whether or not we go over the "Fiscal Cliff", I have to stop and ask the question, have we not already gone over it?  With our government (as well as several  other countries) already trillions of dollars in debt, how can our deficit substantially be reduced without a continued devaluation of the dollar or a serious reduction in our current obligations?  At the current rate of government spending, no amount of tax increases or budget reductions is going to alleviate the insurmountable debt we have saddled ourselves with.  Any actions to reduce the deficit will have a devastating effect on our fragile economy and will have a ripple effect throughout the rest of the world.  Throw into the mix, the Federal Reserve Banks’s penchant for printing more and more money to bolster the economy, unfulfilled future social security obligations, rapidly increasing health care costs, and military commitments that need to be honored, and it is hard to argue that we are not doomed. 

But despite this doomsday scenario the market continues to grind higher, spiking higher or lower depending on who is at the podium and what comments they are making regarding the status of the negotiations.  Therefore, investors must put on the “blinkers” and focus on the task at hand, evaluating their portfolio for the long-term, and ignoring the day-to-day minutiae.

Let's put the recent bull run into perspective by taking a look at a monthly chart of the Dow Jones Industrial Average.  

After bottoming at 6470 in March of 2009, the average has more than doubled, reaching 13,653 in September.  As illustrated by the chart, the steep trend line coming off the bottom at 6470, and connecting with the October 2011 low (10,404), and the November 2012 low of 12,471, remains intact.  With the index nearly 700 points above the November 2012 low, the bulls are still in control.  However, as we all know so well, market moves on the downside are much quicker than they are on the upside, and 700 Dow Jones Industrial points can evaporate in only a few trading sessions.  Couple that with the market leader Apple showing significance weakness, one has to wonder how soon before this long-term trend line is tested again.   

From a historical perspective, it took the average 15 years to climb from 6920 to its all time high of 14,198 and there were lots of bumps and bruises along the way.  Comparing that with a similar move in less than four years, should make the average investor think, have we come too far too fast?  

For those agreeing with this analysis, it may be prudent to take some chips off the table if the current trend line is violated.  It can be said with great certainty that investors who relied on this type of analysis following the trend line off the 2002 low, enjoyed being on the sidelines during the market meltdown in 2008.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted in: Technicals Trading Ideas