The year 2017 was one of the most remarkable years in my investment history…or any one’s investment history. At the beginning of 2017, post the Trump election, the Dow index hovered at an already elevated level of 20,000. It proceeded to advance another 5000 points to touch 25,000 by year’s end; a 25% gain for the blue chip averages. All of the broader markets moved in similar fashion, with the S&P and Nasdaq indices up 22% and 27% respectively.
While these gains are remarkable, what is more amazing was that the broad market advance happened with almost no volatility. The largest correction of the year measured only 2.8%. In fact, the later days of 2017 witnessed the VIX index, a measure of market volatility and by implication a gauge of market nervousness, register an all time low of below 9 on the charts. This has never happened in the 15 plus years for which I have data for this statistic. Another remarkable statistic was that the S&P notched gains in every month for the entire year, a feat that’s never happened in history! This rising tide lifted all boats in the majority of the global markets as most recorded gains, with the exception of Mexico. Clearly, conditions were right for investment in equity markets everywhere.
The implications are that collective factors are supportive of investment markets worldwide. These include interest rates, consumer confidence, business friendly environments and political stability. We can’t recall the last time all of these factors were in sync. In the US markets at least, the statistics which Technicians refer to as ‘internals’ are all in go mode. Advancers versus decliners, new highs versus new lows, new 52 week highs all are supportive of the markets’ advance. Usually, before any significant weakness appears, there will be divergences in some of these measures giving warning of a correction. So far, so good.
Classic Dow Theory posits that the Industrials must be confirmed by the movement of the Transports and thus far, such has been the case. The other measure referred to in assessing market strength is the Dow Utility index. This is the only measure that shows a noticeable variance from the advancing markets as shown below.
(charts by StockCharts.com)
In observing the charts, we see that while the Dow Jones Industrials are at the top end of a presumptive up channel, the Utilities index has been moving the other way, testing the lower limits of its uptrend. This is not necessarily bearish and in fact can be construed as bullish. The implication is that money is moving away from conservative utility yield holdings into the more dynamic growth equities. The fact that the Industrials are trading at the upper bounds of the channel may give pause for the short term, but the market’s strength still looks intact. As we know, at some point, the market will take a breath.
In a previous article, we discussed the issue of rotation and that is what the stock market is doing now even as the indices reach new highs. In following articles, we will look at issues that appear to be benefitting from this rotation of investment monies. What will be obvious is the movement of money into the economically sensitive sectors of growing economies including commodity stocks such as copper and base metals, oil and oil services, pharmaceuticals and bio techs.