A warning sign for stocks

In a classic example of herding behaviour, small investors have become very bullish on stocks. That could signal a turning point for the markets, says John C Burford.

Many think that summer is a bad time for stocks. "Sell in May and go away, don't come back till St Leger Day", as they say.

Although this was pretty good advice in many years before the great crash of 2008, since then stocks have actually risen in the summer months in every year of the past four, except in 2011.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

So this particular trading rule has absolutely no value to me, based on its historical performance.

For a swing trader, there are opportunities at all times of the year. And currently, there appears to be an interesting situation developing in stocks.

Advertisement - Article continues below

Interesting situation in the Dow

This brings up an interesting question regarding the Elliott wave count.

I have been using the following count off the November 2012 low:


From the wave 3 high on 22 May, wave 4 has declined in a clear A-B-C. So far - textbook.

And from the wave 4 low on 24 June, the rally is my wave 5 a final wave before the big decline sets in. And this 5 wave top should exceed the 3 wave top.

That is the roadmap I'll be using until I'm proven wrong.

But the question is this: has this final thrust done enough to call the end to this fifth wave? The closing high has exceeded the wave 3 closing high all right, but the absolute high of 15,540 has not yet been beaten.

Advertisement - Article continues below

The jury is still out on that, as there are no clear-cut rules in Elliott Wave theory to help decide.

But I have a further clue to help me.

What form should this final wave 5 take? Ideally, it too, should contain a clear five-wave form. Let's examine this final wave 5 in detail.

Here is the hourly chart from the 3 July low:


And I have drawn some impressive tramlines. My central tramline sports great touch points and several prior pivot points.

These are very reliable tramlines, so far.

Advertisement - Article continues below

Of course, a break below the lower tramline would be negative for the rally, but so long as this does not occur, the next target will be my central tramline in the 15,600 15,750 region.

This sets up the likely Elliott wave labels here:


If the market can make it to the centre tramline, that should be wave 3 of the final wave 5 from the June low.

Then, a dip in wave 4 and finally, a new thrust up into new high ground for the final fifth wave, as shown, perhaps to my highest tramline in the 15,800 region.

That will be my roadmap for now. But I will watch carefully for a lower tramline break.

Herding in action?

Non-commercialCommercialTotalNon-reportable positions
$5 X DJIA INDEXOpen interest: 115,832
Changes from 2/7/13 (Change in open interest: 11,573)
Percent of open in terest for each category of traders
Number of traders in each category (Total traders: 98)

But ominously the small investor has suddenly become very bullish, after generally distrusting the four-year rally. The pros have been wildly bullish, while retail investors have been mostly neutral in the past four years.

Advertisement - Article continues below

Here is the latest AAII data:

49% (up 7% on week)18% (down 6%)33%
Long-term average39%30%31%

This is classic herding in action.

And this is what occurs at big market tops and why monitoring sentiment data such as this can help you pinpoint turns.

And using my tramline method can give you an edge in your timing a most essential component of successful trading.



Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020