Is It a Situation of Too Much in a Short Time?

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When the Dow Jones Industrial Average went up as it has lately, it soon dived 900 points. Is this a pattern that’s likely to return?

If we review the market in October 2014, we find that it decreased to 15,900 prior to starting the recovery process. In August 2015, the market was 15,400, which is similar to the previous year.

After the market decrease in 2014, the reversal process was quite impressive; it increased over the next seven weeks finally reaching a peak around 18,000 points.

The recent recovery process, however, was only four weeks long with a peak thus far of 17,700 points. The status of the rally has not been determined, but several coincidences are obvious.

When first reviewing the market, the DJIA may appear to have a little more to increase until it equals the October 2014 recovery, although it’s actually exceeded them. October 2014 lows to its 7 week peak provided a 2,100 point increase, while the current reversal process is at 2,300 points, which is higher than the increase of 2014.

In addition to the increase being higher, it occurred 3 weeks faster than the reversal of the prior year. This highlights a question whether the market is increasing too much in a short amount of time. They had thought so last year.

Once the seven-week rally took place, in December 2014 the market peaked around 18,000 points and continued to drop rapidly. The decrease was aggressive and within a week declined by 900 points. A sign that the rally was sold by the market, will it happen again?

The question is due to the larger magnitude of the current rally being higher, in a shorter amount of time, is the same selling pressure going to occur again at the same degree?

While nothing is certain, coincidences are what Wall Street thrive on, and rationalizing decisions is what investors enjoy doing most, providing all the reasons for them to do just that. By reviewing the movement of the market last year, they could choose to sell and use that to justify their choices.

In our opinion, you should prepare, and by that we mean, “put up your defenses.” The market is not currently overbought “officially”, although that can change at any time in the future.

[Photo used for the featured image: "Rally côte chalonnaise” by mgaloseau, used under CC BY-NC / Color filters added, image cropped]

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