Momentum is Overheated in the Dow Jones Industrials

  • Posted by on October 19th, 2017 at 7:59 am

The whole world is getting hotter. My friend in Singapore noted that the mercury hit 39 degrees Celsius (102 F) yesterday and it is mid-October. The stock market has been hot too. The Dow Jones Industrial, S&P 500, Russell 2000 and Nasdaq 100 have been setting new record highs seemingly every day. With the stock market hot in October it seems all the crazies come out. Some of them have been calling for a crash for years. You know the names, Faber, Roubini, Schiff, Hussman etc. But October even gets them more crazy if that is possible.

October is also the anniversary month of several market crash events, and that adds to the heat. We humans love to dwell on these price drops. And this year is the 30th anniversary of Black Monday, the 1987 crash where the Dow dropped 22%. Momentum in the Dow Jones Industrials is as hot as it has been.
So with the markets running hot and the calendar in October is this the perfect set up for yet another crash? Never say never, but……

The chart above shows the price action in the DJIA over the last year. Nearly straight up since May. Draw your attention to the momentum indicator, RSI, at the top of the chart. At 86 it is definitely hot and probably overheated. But overheated does not mean a crash is imminent. You need only look back to the 3 other peaks in the past 12 months to see that this level of momentum can work its way off through a sideways correction or shallow pullback. No one knows if this time will be different or not. But that will not stop the debate.