Written by: Tom Dorsey , Founder, Dorsey, Wright & Associates, a Nasdaq Company
It’s finally over. After 597 long days of campaigning, we finally have a winner for the US Presidency. While Election night left many watching in a puddle of nerves, the Dow futures were dropping lower and lower in anticipation of a potentially too-close-to-call election and the uncertainty that would have come with it. Luckily, by the morning the markets not only held steady, but even closed slightly up that day.
So where does this leave us now? No doubt we are at a nexus of change in the country. And what happens with change? History reminds us:
Years ago when I became fascinated by the book Predictions: Society’s Telltale Signature Reveals Past & Forecasts the Future by Dr. Theodore Modis. I was so intrigued that I dragged my wife off to Zurich to meet the author. We became friends, and I later ended up hiring him as a contract researcher to help our team at Dorsey, Wright & Associates (DWA). As part of his work, I asked him to create an S-curve (an important part of his predictive methodology) to chart the Gross Domestic Product (GDP) of all the countries with market exchanges. And was that S-curve enlightening! What it showed was that the maturity of each country’s economy was directly related to its GDP. China, India, and Malaysia had GDP in the single digits. Older economies that had “used up” their GDP were at the other end of the spectrum, with the US and Denmark at 70% and 80%, respectively. The most interesting result though was German’s GDP, which was a modest 50%. How can that be? Despite the age of the country, Germany was forced to start over completely after WW2, reinventing nearly every business. It’s one of the reasons Germany’s economy is so strong today—and the largest national economy in Europe.
When Dr. Modis analyzed the data, his conclusion was clear: to become strong again, the US had to do what Germany had done. To reenergize our GDP, we had to focus on a fundamental change.
What does change — or reinvention — and a new place on the S-curve mean for the market?
If the new administration is able to deliver on its promise, we may very well be headed into a new period of growth. Greater growth is good for the economy and good for investments. And while no change of that magnitude happens overnight or without bumps along the way, I am hopeful.
Only time will tell where the market is heading tomorrow, and at DWA we believe that when you start looking past the headlights, you can find yourself in deep trouble—and with empty pockets. The one thing we do know for certain is what the technical indicators are telling us today. By looking at the data, we’re able to sidestep all the noise of the market and the media and see what is really happening based on momentum and relative strength. That data shows us what we should be focusing on (and buying and selling) today.
Right now, while the relative strength picture continues to favor US Equities above the five other asset classes we monitor within our asset class allocation tool, the short and intermediate term indicators are telling us that the asset class has been under selling pressure and it’s time to proceed with caution. As you saw with market action on November 9th, rates continue to move higher, putting pressure on Fixed Income prices. So if you’re in a traditional 60/40 portfolio, your breaks may start to vanish unless you take some action now. Are bonds or cash vehicles your best option? This is a good time to do some research on the DWA Technical Research Platform, use our asset allocation tool, and reallocate. Set up email alerts to watch for changing buy and sell signals, and stay on top of the data. Keeping an eye on the data is the best way to do that.
As we move forward, there’s no doubt that there will be a lot of noise as we all try to get a grasp on the direction of the country, the direction of the markets, and the direction of the future. I have great expectations for what’s to come, but ultimately I trust one thing only: the data.
To learn more the DWA Technical Research Platform, click here to take a free 21-day trial . To learn more about Relative Strength and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals , or contact us here .
Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities, or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives. Advice from a financial professional is strongly advised.