• The 3 major US stock indexes all posted new all-time highs during the post-US presidential election euphoria/hysteria.
• These same 3 indexes all completed long-term bearish technical reversal patterns over the past few months, indicating previous uptrends had run their course.
• Once again, Warren Buffett looks to be correct, this time with his view of technical analysis in general. 

If you happened to tune into your financial media of choice over the past four years, you likely heard something falling into these 3 categories:

• The US was headed for an economic apocalypse.
• US stock indexes were going to collapse. (Using the incorrect logic of Stock Markets = Economy)
• And finally, the continued posting of new all-time highs wasn’t real. (I found a great deal of humor in this particular argument.)

Here’s the new all-time high scorecard for the 3 major indexes from December 2020 through November 2024, a time span of 48 months, using monthly high-low-close charts: 

• The Nasdaq ($NASX) posted 16 new all-time highs, or 33% of all months, the latest being November 2024
• The Dow Jones Industrial Average ($DOWI) totaled 22, 46% of all months, again with the latest being last month
• The S&P 500 ($INX) amassed 24 new all-time highs, 50% of all months, and closing out the trifecta for November 2024

These results are pretty good for an ongoing market collapse, right? Or maybe I’m missing something. Either way, it should be noted the talking heads of financial media have grown quiet. There is little in any mention of the three crises listed above. To the contrary, some are now saying there is no stopping US stock indexes and that economic signals are actually bullish. I find this interesting and can’t help but wonder cynically what happened. (Though I know the answer.) As with most things these days, political opinion trumps reality. 

You’ll recall my opinion on the major US stock indexes changed at the end of October. As I wrote about in early November, before the US presidential election, the major markets completed bearish technical reversal patterns on their long-term monthly charts, telling us the uptrends that began with the close of October 2022 had come to an end. What’s interesting about the last couple long-term trends is they haven’t last all that long, in investment terms. The downtrend that ended in October 2022 began with bearish reversal patterns completed at the end of January, meaning it last only 9 months. This made it look like more of a pregnant pause in the previous uptrend than a new downtrend. 

Fast forward to the end of October 2024, and again we saw what looked to be an end to the long-term uptrends. These thoughts were quickly washed away, possibly, by the post-US election euphoria/hysteria that led to last month’s new highs. Has the technical picture of US stock indexes changed to bullish again? Do we have to discount the November spike on the idea markets will fall back into expected patterns? Or, as I talked about in a recent Column, is Warren Buffett correct when he said, “I realized technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” Granted, this was likely said with some of Mr. Buffett’s legendary humor, but the bottom line is he has no use for chart patterns, preferring to study stock fundamentals instead. 

As an analyst who has spent nearly 40 years studying price charts, I’ll say that technical analysis has served me well over time. Keep in mind the three premises on which technical analysis (the study of market action) is based[i]:

• Market action discounts everything.
• Prices move in trends.
• History repeats itself.

Let’s take these one at a time, starting with “Market action discounts everything”. This tells us anything that can affect price action is factored into the price. This includes geopolitics, economics, and fundamental analysis in general. Therefore, it could be argued that technical analysis is also the study of real market fundamentals in real-time, as opposed to the scheduled release of imaginary supply and demand “data” from government agencies.

“Prices move in trends”, with trend defined as price direction over time, is simply Newton’s First Law of Motion applied to market analysis: “A trending market will stay in that trend until acted upon by an outside force.” Usually, that outside force is investment money. I’d like to say the evolution toward more algorithm trade includes an increased focus on real market fundamentals, but then we see the rise of meme stocks and the idea of fundamental analysis is thrown out the window. Setting this phenomenon aside, I still see markets moving in trends, simplifying our analysis to watching for changes in price direction indicating a change in flow of investment money. 

The third premise, “History repeats itself” is where I’ve lost some faith in technical analysis over the years. Chaos Theory[ii] tells us that one change in the dynamics can lead to a different result. This means that technical patterns don’t really work, something Mr. Buffett recognized decades ago. I remember taking part in panel discussions when other “analysts” would talk about “reverse head and shoulders”, Bollinger bands, and so on. The reality is most analysts can look at a chart and see something different, similar to economists evaluating economic data. 

I know I’ve just scratched the surface on what needs to be its own book on investing, so let’s return to the original question: Are US stock indexes still bearish? If I look strictly at patterns, I’d be leaning toward “Yes”. However, if I take a step back, look at monthly closes only, and apply Newton’s First Law of Motion, the answer has to be “No”. US stock indexes should be considered bullish until a clear change in trend occurs. Regardless of all the noise.  

[i] From “Technical Analysis of the Futures Markets”, by John J. Murphy, 1986 edition, pg. 2

[ii] An important book for anyone interested in market analysis is “Chaos: Making a New Science” by James Gleick.