All current discussion about stocks centers on whether stocks can continue their climb upwards. While there have been countless small issues tugging at the market, little has happened to change the positive sentiment overall, leaving bulls firmly in charge (see Three Tech ETFs Still Going Strong).
While the major U.S stock indexes have kick started 2013 making multi year highs, the biggest question still remains if they can sustain these levels or surge even higher from here onwards. And if yes, what fundamental drivers can cause them to do so?
Although the economy witnessed negative GDP growth this latest quarter, it was more on account of an aftermath of Superstorm Sandy, and some accounting tricks, rather than any other factors. In fact, a surprisingly better-than-expected earnings season has driven the domestic stock markets high this time.
However, viewing this fact in isolation will not be enough to address the issue. As it has become widely known as of late, earnings of U.S.-based companies are increasingly dependent on overseas markets.
In this regard it is prudent to mention China, which has overcome the possibility of a hard landing and is on its way to recovery (see Can Solar ETFs Continue Their Bull Run?).
European nations are also worth mentioning, s they are the largest trade partners of the U.S. and they have been relatively stable over the last few months thanks to the efforts of the ECB. These factors have been largely responsible for the better-than-expected earnings picture.
While this has definitely helped the markets to sustain these high levels, only time can tell if such optimism from the earnings front is already discounted by the markets.
Whatever be the case, these factors will have an effect only in the near-to-mid-term. However considering the long term scenario, some interesting charts definitely have a lot of messages to convey.
The above long term price chart (10 years) is of the SPDR Dow Jones Industrial Average ETF (DIA) which hints at a textbook double top pattern. The unadjusted ETF prices have been used as a proxy for the actual index i.e. the Dow Jones Industrial Average. While it is still early days to call it tops, the ETF (and Index) remains overheated nevertheless.
The Relative Strength Index reading of 66.03 signifies that the ETF has been overbought. In fact, it has been hovering near the overbought territory for a very long time. This chart pattern definitely points towards an eminent correction (read Three Surging ETFs with Strong Momentum).
Some may argue that the Dow is not a true and fair indicator of the large cap sentiment primarily due to its small sample size. However, the long term price chart of the SPDR S&P 500 ETF (SPY), representing the S&P 500 also exhibits somewhat similar characteristics (unadjusted).