Ernest’s market opinion – Are we heading to a blow off phase? (18 Jan 18)

Dear all

Dow surged past 26,000 overnight and Hang Seng closed at a record 32,122 today. Is the BIG Bull coming?


For this write-up, I will focus on the U.S. market

Based on Bloomberg, Grantham, the chief investment strategist for GMO wrote on 3 Jan 2018 that the U.S. stock market may be approaching a melt up or blow off phase. A melt up phase refers to a sharp increase in the share prices driven by sentiment or the fear of losing out.

Are we in the blow off phase? To be frank, I am not sure. However, here are some startling statistics to ponder.

a) Dow has surged 5.7%, or close to 1,400 points since the start of the year;

b) Dow took 13 calendar days to rise more than 1,000 points and closed above 26,000 on a closing basis on 17 Jan 2018. Based on Bloomberg (See Chart 1 below), this is likely to be the fastest on record;

Chart 1: Dow Jones 1,000-point track

Dow 1000 point chart

Source: Bloomberg 16 Jan 18 (Dow hit 26,000 on 16 Jan but I disregard this as it did not close >=26,000 on 16 Jan)

c) Investor optimism recently hit a 7-year high. Based on the latest AAII Sentiment Survey, 59.8% of the people surveyed expect to see stock prices rise over the next six months. This was the highest percentage in the past seven years. Historical average is around 38.5%;

d) Volatility in the market is among the lowest in 118 years. Although this does not necessary imply or indicate that the market will tumble soon, it seems that market is quite complacent now. See Chart 2 below.

Chart 2: Volatility among the lowest in 118 years

Volatility is among the lowest in 118 years (Deutsche Bank Jan 2018)

Source: Deutsche Bank see above

e) Dow has reached the highest RSI overbought level since 1990

Using Bloomberg’s data since 1990, Dow’s RSI hit the highest yesterday at 88.5! Using Yahoo Finance data, MACD seems to have reached the highest level since 1990 too. Although overbought conditions can remain overbought for an extended period, extreme overbought levels such as now, typically face some form of consolidation in the near term.


My two cents worth

I have pared most of my equity positions and have have initiated opportunistic short Dow positions via CFDs as I think that markets, especially the U.S. market may consolidate in the near term.

Notwithstanding the above, based on current information, I believe that the trend continues to be up over the medium term and I am ready to accumulate shares either on weakness, or / and nearer to their results.


Some additional information

As some of my active clients are interested in the U.S. market, I have compiled a list of Dow 30 and S&P500 stocks, sorted by total potential return. Table 1 shows the top five stocks with the highest total potential return. (My clients will receive the full compilation of the above lists via email.)

Table 1: Top five U.S. Stocks sorted by total potential return

Table 1_Top five U.S. stocks with the highest total potential return 18 Jan 18

Source: Bloomberg 18 Jan 18



1. Component stock of Dow 30 / S&P500;

2. Presence of analyst target price;

3. Even though I put “Ave analyst target price”, some stocks may only be covered by one analyst hence may be subject to sharp changes. Also, analysts may suddenly drop coverage;

4. Analyst target prices and estimated dividend yield may be subject to change anytime, especially after results announcement.

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P.S: Do note that as I am a full time remisier, I can change my equity allocation fast to capitalize on the markets’ movements.



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