The Dow Industrial Average has just reached a new intra-day all-time-high of 14,280. It is has been up more than 150 points on the day. This follows a run up from a low of about 6,700 in March 2009.
As most of us are aware, the broader economy is in far from robust condition. A short list is:
- Unemployment rate: 7.9%
- GDP Growth Rate: 0.1%
- Incomes dropping most in 20 years.
- No real rotation out of bonds: 10 year US Treasury yield 1.89%
Is the DOW's move into record territory a simple case of a classic "blow-off top"?
Definition of 'Blow-Off Top' A chart pattern that indicates a steep and rapid increase in a security's price and trading volume followed by a steep and rapid drop in price and volume. The rapid changes indicated by a blow-off top, also called a blow-off move or exhaustion move, can be the result of actual news or pure speculation. - Investopedia
The primary driver of higher equity prices has been the aggressive monetary easing actions taken by the Fed. The question is: When does the fuel run out? At some point the fundamentals will have their say and stock prices will reflect them more accurately. But until then it may be instructive to consider the move we are seeing in a technical light.
The missing ingredient in this rally has been volume (see the rally's trading volume on the bottom of the first chart). Should the fundamentals continue to be separated from the rally in equity markets, watch the technical ingredients for a blow-off top.
If volume should pick-up, along with a parabolic move upward it would be fair to say that we may be experiencing a blow-off top in U.S. equity markets. A move of this nature should be watched carefully for a potential opportunity to short the market.
A correction of 10% or more from a technical move such as a blow-off top would be reasonable given the sustained move upward we have seen in the last few months.