This post-election stock market rally has been exciting and profitable, but it has also become long in the tooth. After going nowhere for almost two years, the Industrials shot from 18,000 to 19,000 in about a two-week period, took out the 20,000 mark roughly two months later, and now we’re closing in on 21,000.
You can see the entirety of this move in the chart below, which also contains indications that more gains may lie ahead.
During this post-election move, we’ve had almost nothing in the way of a correction or pullback. Instead, we saw the development of a horizontal flag pattern.
Flag patterns are continuation patterns that are formed when there is a sharp price movement in one direction, followed by generally sideways price action. When we see these types of setups, it’s an indication that the subsequent breakout is likely to be in the same direction, and of the same magnitude, as the initial price movement.
In the chart above, the blue channel marks the actual flag formation, and the leftmost green vertical line represents the flag pole (measured from the breakout above prior resistance). In these types of patterns, the subsequent price target after the breakout is based on the height of the initial flag pole.
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Applying this logic, it suggests that the new upward leg could reach as high as 21,750 (rightmost green vertical line), nearly a thousand points above where we are right now.
And it’s not just the Industrials that are showing this setup.
We’re seeing the same type of formation in the S&P 500, which is shown below. Applying the flag pattern logic here, we end up with a price target of roughly 2,410.
Whether we reach these levels is anyone’s guess, but considering the impressive current momentum of the market, it’s definitely a possibility.
We’re also getting confirmation from elsewhere that perhaps these new highs are justified.
Last Friday The Conference Board released its data for January and the results were quite strong. The Leading Economic Index (LEI) rose 0.6%, after rising 0.5% in December and 0.2% in November.
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This prompted Ataman Ozyildirium, Director of Business Cycles and Growth Research at The Conference Board, to say, “The January gain was broad-based among the leading indicators. If this trend continues, the US economy may even accelerate in the near term.”
You can see The Conference Board’s Leading and Coincident Economic Indexes in the chart below.
The US LEI has a solid track record of forecasting turning points in the economy, and the message we’re receiving there is that everything is humming along just fine.
So what about the rest of the world?
Believe it or not, it’s not just the US that’s experiencing markets hitting all-time highs. We’re seeing this around the globe as well.
As you can see in the chart below, the Global Dow Index recently made it back to new-high territory, taking out its previous double top from 2014 – 2015.
This is a very good sign when you consider that equity markets discount future economic conditions six to nine months out. And it jibes with other measures of expected economic performance.
In addition to the US, The Conference Board also provides Leading Economic Indicators for most other countries.
In the table below, we can see the latest changes in LEI’s for the world’s top economies.
Notice that with the exception of Australia, Japan, and the UK, we’re seeing solid developments around the world. Thus from both a technical and fundamental perspective, it appears that equity markets should hold up well over the coming months.
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