“Hi David, Is there any significance to the sharp "V" shape that many shares and indices have shown in the last month or so? I see Edwards and McGee doesn't mention the pattern. I realize patterns are passé in your outstanding service but this one is really striking.”

David Fuller's view

Thank you for your topical question which will surely be of interest to many other subscribers.

These charts of the S&P 500 (weekly & daily) and the Nasdaq Composite (weekly & daily) were telling because breaks in the long sequence of higher reaction lows could have easily been followed by a brief rally and further correction.  Instead, all US indices rallied even more decisively than they fell, receiving an additional boost on the 31^st from Japan’s bullish policy surprise. 

This rapid recovery to new highs could only have occurred if there were sufficient buyers with substantial funds, who had been waiting for a correction before increasing their exposure.  Additionally, it impressed long holders sufficiently to prevent them from selling aggressively into the rally. 

As you can see from the Stochastics indicators beneath the daily charts above, we have gone from a deeply oversold condition in mid-October to an equally overbought reading today.  Therefore, it would not be surprising to see a temporary reaction and consolidation.  However, that would be occurring from new highs on US major indices, within uptrends which are still intact, although they have lost some of their consistency characteristics. 

That may lead to some more turbulence but assuming most of the recent rally gains are maintained during a consolidation, as I suspect, and followed by another move to new highs, the overall outlook will remain bullish.  Conversely, if the mid-October lows are taken out for any reason, bears rather than bulls will have the upper hand. 

I am also impressed by the Russell 2000’s recovery (weekly & daily).  I had previously described it as the canary in the coal mine, and it certainly gave us advance warning of the broader market’s brief, sharp correction.  RTY has rallied well back into this year’s toppy looking trading range, although I would like to see it break the sequence of lower rally highs since July, by closing at least above the September high.  I suspect it will.  Crucially, monetary policy remains extremely accommodative, despite the end of QE purchases.

Lastly, we know that Wall Street is both overleveraged and somewhat more expensive than most other stock markets.  Those are legitimate medium-term concerns for equity investors in any market because the US can cast a long shadow.  However, it is currently providing a further ray of light, as you will also see from some of the shares that Eoin is reviewing today, including Proctor & Gamble, Kimberly-Clark and Johnson & Johnson.  These are outstanding Autonomies which remain in form.