A massive turning point is near – here’s how to trade it

We’re approaching what is possibly a huge inflection point in some of the world’s most important stock markets.

The S&P 500, the FTSE 100, Germany’s Dax – they’re all closing in on their all-time highs.

We could see a massive, multi-year ‘triple top’, marking the end of a phenomenal run, which began in the aftermath of the stock market crash of 2008.

Or we could see a break-out to new highs, a move into ‘uncharted territory’.

The decision-point could be as soon as a few days away…

These markets are at critical levels

Let me start by showing you some charts of the S&P 500, the FTSE 100, and the Dax over the 14 years since 1999. They clearly show the decision-point we’re coming to.

In the interests of European union, let’s start with the Dax. Below, I’ve drawn a red band across the top of the chart, marking the 2000 and 2007 highs and the wall of resistance they represent. The big issue is whether that band, just a few percentage points away, will prove to be a barrier – or whether this bull market will slice on through it.

DAX stock index

Below, we see a similar pattern in our own FTSE 100, although we are slightly further off the all-time record. The FTSE is less than 10% off its all-time highs as the British economy teeters on the verge of triple-dip recession. There, if you still need it, is proof that economies and stock markets do not necessarily correlate.

FTSE 100 stock index

I have also marked the bottom of the range – support – in green. You can see how well-defined it has been over the period.

Finally, there’s the S&P 500 (below). There is the same the red wall above. But we’re just 65 points away from that 2007 all-time high of 1,576. Cripes, so bullish is sentiment, even Facebook (a Nasdaq stock, I know) is approaching its IPO price.

S&P 500 stock index

You can also see the defined range it has traded in over the last 14 years. Two huge bear markets – 2000-03 and 2007-09 – and two equally huge bull markets – 2003-07 and 2009-13. Is this bull market about to end? Are we on the brink of a new bear?

We could know very soon. The big red wall of resistance is perhaps just a few days away. So what – if anything – can we do with this information?

What happens next?

“Let the trend be your friend – until it ends” is the maxim of the highly successful investment strategy known as trend-following. And what a trend it has been to ride – not just since the doldrums of last summer, but since the lows of 2009. This bull market really has climbed the proverbial wall of worry.

However, there is another, often equally successful method, which you might call ‘range-trading’. This involves identifying ranges – support and resistance levels – and making your buy and sell decisions based on these. “The trend shall fail, range shall prevail”.

So who will be proved right? The trend-followers or the range-traders? The bulls or the bears? Are we headed higher or lower?

Nobody really knows of course – and anyone who tells you they do know is a dangerous person with whom to have money invested. It is possible, however, to make an educated guess, and manage your risk accordingly.

Starting with perhaps the commonly used investment decision maker of all – gut instinct – this doesn’t ‘feel’ like a long-term top to me. There isn’t talk of new paradigms. I’m not being given stock tips by shoe-shine boys. There isn’t the sense that there are no more buyers still to come into this market – there are plenty still left on the sidelines.

So that’s my ‘gut’ feeling. What about the arguments for and against? I’m enjoying reading some strongly worded cases on both sides. In the one camp, we have people such as our own Tim Price (who is producing some excellent material at the moment). He says that this is “the most difficult economic environment he’s ever known in which to invest”.

Mark Mahaffey, chief financial officer of Hinde Capital, endorses this view. He reckons “there has never been a riskier juncture in the history of investment at which to put money at work.” Mark, like Tim and I, recommends gold.

Over in the bull camp, we have the likes of the legendary hedge fund manager Kyle Bass, who recently declared on CNBC that he expects the S&P 500 to move higher – at least in nominal terms, if only because of the consequences of inflation. (Bass, I believe, also likes gold).

Meanwhile, JC Parets of Eagle Bay Capital notes on his blog, All Star Charts, that as the S&P 500 goes in January, so goes the year. “Since 1950,” he observes, “this indicator has an incredible 88.7% accuracy ratio.” The S&P 500 was up 5% in January, which bodes well for the rest of 2013.

They’re all good arguments. If markets sink from this obvious inflection point, the rationale of the bears will seem entirely obvious. And if you were long, you’ll have wished you’d listened to them. But if the market rises – and you weren’t on board – you’ll have wished you listened to the likes of Parets.

How to trade this huge turning point

I’ll give you my tuppence worth – then suggest how you go about playing your own view.

Yes, there is too much debt. Economies are fragile. Growth is weak. But it’s not like people don’t know that. A lot of money has been created since the 2000 and 2007 highs (a lot of wealth has been destroyed too).

And perhaps more importantly, there are a lot of people – some of them managing large portfolios – who have missed this bull market and are waiting to get back in. They’re behind their benchmark. Some of them have angry clients shouting at them: “How did you miss this?!”

Those clients are threatening redemptions. The ruthless guillotine of the City cull is hanging over. It doesn’t matter what the underlying facts may or may not be, they have to get in and chase this market higher. It’s what some call the ‘pain trade’ and it could easily push stock markets a lot higher.

Perhaps this is the beginning of a Ludwig von Mises, inflationary, crack-up boom when people suddenly become “aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them”.

I don’t think it is, however. My prediction is that we might make it to the highs, maybe even inch above them, then we slide back for a bit. But we’ll break through them convincingly later in the year.

But I don’t have a crystal ball. This is a time to manage risk, as it really is an obvious inflection point. If you think the market’s headed lower, and you’re betting on that, put your stop somewhere just above those all-time highs.

If you think it’s headed higher, do the opposite, stay long, but with a tight stop just below those all-time highs. That barrier of resistance could very easily soon become support.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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22 Responses

  1. 06/02/2013, Hugh wrote

    This is Marc Faber’s prediction also. We correct a bit, then we make new highs later this year – then we erase the gains. All sounds like dicing with death to me. Good luck putting money into that crab shoot!

  2. 06/02/2013, Chester wrote

    Some call it the classic head and shoulder formation. Under normal circumstances, the significant reversal should take place before the all time highs are taken out. If markets head higher, all bets are off

    If the turn happens now, it is a great time to short. The slide will be long, fast and deep

  3. 06/02/2013, Mikey wrote

    PLEASE don’t refer to any of these patterns as ‘Head & Shoulders’ – they are nothing like it. If you want to see a real H&S pattern, look at a monthly chart of FTSE – the first top (in 1998/2000) is almost classic – and you can see what happened next …

  4. 06/02/2013, tuesday wrote

    “Are we headed higher or lower? Nobody really knows”

    “the (most?) commonly used investment decision maker of all – gut instinct”

    “This doesn’t ‘feel’ like a long-term top to me”

    “I don’t have a crystal ball”

    Can someone- Dominic perhaps – tell me what the point of this article is?
    And whilst they are at it, when “the End of Britain”, “the devastating fall in house prices” or “the imminent demise of the Euro” (remember ‘get out of this doomed currency NOW!?”) as predicted by MW are going to happen. I know creating anxiety is a tried and tested advertising technique but when will those who have subscribed as a result see the proposed strategy for survival?

    Just seems to be more share tips and stating the obvious as this article!

  5. 06/02/2013, Simon wrote

    I’m invested in both gold and equities. One thing not mentioned is that pension funds are moving away from bonds and into equities, so that in part explains the recent rise.
    What concerns me is gold and the allegations of price manipulation. Almost daily Goldcore reports massive buying across the globe, yet the price just continues to sit at around $1,650. We know that there’s a currency war on with central banks around the world debasing their currencies, yet until recently money printing was actively pushing up the price, now it’s seemingly having no effect. Even Obama’s election victory seems to have passed gold by.
    The question therefore is: are central banks manipulating the gold price, preventing it from reaching ‘true value’ by keeping it low, to try and dissuade every man and his dog from pulling out of paper money?
    An future article in MoneyWeek that answers this question would be welcome.

  6. 06/02/2013, JREwing wrote

    It is amazing that so few are really focused on what could be the best trade of the century. My entire portfolio is already up 10 percent in six weeks since I got into it. And it has nothing whatsoever to do with the stock market – which is mostly an irrelevance that far too people get obssessed with without ever making any serious gains.

  7. 06/02/2013, PJM wrote

    Spot on “Tuesday”……..but surely nobody is subscribing to anything based on the “clap-trap” in these articles.

    I generally delete these on receipt…….might read from time to time for a laugh……but that’s it and I wouldn’t dream of making any investment decisions based on this rubbish.

  8. 06/02/2013, DRH2761 wrote

    I remember reading Ms Webb back in 08 at the markets nadir.
    Stocks will get cheaper she stated. They didn’t, at least they haven’t so far.
    Now when Money Week turn bullish it’s time to short the market.
    As you point out stock markets no longer appear to have any links to fundamentals, this will not last. Never has never will.
    Now all I need to do is use the cash I made by not listening to Money Week in 08 to protect shorts place contrary to their advice now!

  9. 06/02/2013, chris wrote

    Long term it doesn’t look like a triple top to me, although in 2008 it looked like a double bottom, but not anymore, it’s more a big ascending triangle and as such it is more likely to reach new highs IMO. Oh yes it can correct significantly before getting there, and yes the world is in the big c..p.

  10. 06/02/2013, Aff wrote

    ly building the presure for bigger moves up later.

    Good luck to those in the stock market but I wouldn’t go near that just now, my bet is on gold, and I’m looking longer term. I’ll scoop up shares when we’re near the bottom of that range not the top.

  11. 07/02/2013, mikkip wrote

    Moneyweek… you are a bunch of amateurs who have no idea about making money… you’re journalists and not traders… and that’s why you keep churning out platitudes and advice which is as useful as a kick in the groin… this article is a waste of time!

  12. 07/02/2013, Colin Selig-Smith wrote

    Ask yourself what credit is doing? Do banks have vast quantities available to lend? Because that’s what UP requires. Now if they had all gone bust, the creditors and bond holders wiped out then total leverage would have dropped dramatically and the already spent credit out there in the economy no longer saddled by it’s corresponding debt would have fueled a take off… but we didn’t do that, all the old bad debt is still there.

    So look DOWN not up. We are Japan.

  13. 08/02/2013, John860 wrote

    I’m probably in a minority of one but I found this an interesting article with clear viewpoints. Frisby seems to have a good awareness of investment policies and for me he is one of the better financial journalists on MW. He certainly isn’t one of the soothsayers or doomsters mentioned in earlier comments.
    As for those who feel the banks should have been let go to the wall – they would be better to rethink their analysis rather than wishing for armageddon.

  14. 08/02/2013, dialucrii wrote

    @john860 – I appreciate that letting the banks go to the wall would have brought it’s own problems, but what is happening in our economy under the government’s current policies amounts to no more than a massive transfer of wealth from the poor/middle class majority to the wealthy minority the government seeks to appease, not to mention the complete betrayal of the underlying principle upon which our economy is solely based, – capitalism. That might even be acceptable if it meant avoiding an economic collapse entirely, but most agree that current policy is simply postponing and exacerbating an inevitable outcome

  15. 08/02/2013, dialucrii wrote

    Had be allowed the banks to fail in the beginning, yes it would have been painful for the economy, but it would have meant that those resources that have since been made available to zombie banks, zombie businesses and zombie home owners, could instead have been put towards enabling those viable business and viable investments that remained to stabilise and eventually heal the economy.One wonders what our economy would look like now (and that of many nations in our situation) had we gone with option B. No matter how bad things were for a while, perhaps politicians could remove their tongues from their cheeks when they mentioned the word “recovery”, or at least be good deal closer to doing so.

  16. 08/02/2013, dialucrii wrote

    The truth of the situation is that no western government will ever be in a position to take let big business fail so long as their power and very existence is so inextricably linked to the survival and success of those wealthy individuals and businesses that fund them. It is a basic human instinct not to bite the hand that feeds you and while letting the banks and other rotten business fail might have facilitated a genuine economic recovery, it would also have bitten off an arm.

  17. 08/02/2013, Luck or skill? wrote

    I’ve managed to turn £200 into £65,000 since August 2011 by day trading the FTSE – which was nice.

  18. 10/02/2013, Skepticality wrote

    @”Luck or Skill” – Really? – I mean REALLY? and legally? – well, rather than just posting a smug show off, perhaps you’d like to illustrate to all, precisely, specifically how you achieved this remarkable 32,000% return in 18 months.

  19. 10/02/2013, Fred wrote

    The CAC and FTSE MIB are far from their tops of 2008.

    Bet on the best PIGS !

  20. 11/02/2013, Luck or skill? wrote

    Skepticality,

    Hi, yes sorry I was being smug. Can’t argue with you there. Obviously I’m not going to say exactly how I did it (would you?), but it was by spreadbetting. I was taking much too big a risk to begin with, but have reignedd that in massively, so the kind of exponential growth I’ve had is not going to continue. But yes I did really do it legally. This kind of article by a journalist (not a trader) kind of makes me laugh. If you were a financial/trading wizard why would you be working as a journalist?

  21. 08/03/2013, Peter wrote

    Dominic you are laughable,
    You have no more idea about equities than you do gold and gold stocks, don’t give up your day job !!

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