Daily Archives: March 29, 2017

Looking for signals: are we living a trend change in Dow Jones?

There have been many comments about the bullish trend in Dow Jones after the election of Donald Trump as US president. The US index reached the maximum 20,000 mark after the Inauguration Day very quickly. The given explanation is that Trump plans and market reaction remembered the first Reagan term in the 1980’s. The current debate is if the bullish trend will keep on or not. There are already pundits that have spoken about a dramatic crash, but in T-Advisor, we prefer to consider figures instead of opinions.

First of all, we have to consider two main points:

  • It is not possible to predict the future.
  • Past performances do not guarantee future ones.

Although they are broadly known, it is useful to remember both, as people take some prospects as immediate reality, but they aren’t.

Let’s look at some technical analysis references in the Dow Jones chart in T-Advisor:

Dow Jones chart in T-Advisor

Technical analysis specialists usually consider that:

  • When two MACD cross from up to down, there is a possibility of negative change of trend. This happened at the beginning of March.
  • When the line crosses a Bollinger Band, investor should look at a repetition of this crossing. If it repeats, there is a possibility of trend change. The first crossing happened some days ago in the lower band.

On the other hand, if we make a bootstrapping analysis of the Dow Jones for the next year, this is the result:

Dow Jones bootstrapping in T-Advisor

The distribution of the possible performance is the following:

Cumulative returns distribution of the Dow Jones for 2017

There is 66% of probability that the Dow Jones close the year with a positive performance. The main result is between -0.4% and 6.4%. Negative results consider 33% of probability from -0.4% and -34%.

Other figures found out in the T-Report of Dow Jones are that the volatility is 9.50%, which is low compared with other indexes and the VaR 1-week is 1.54%, that shows also a low result.

How can we consider these figures? Well, there are some technical signals that might provide the idea that there is a change of trend. The current volatility and VaR shows that the movements are not dramatic in this moment. Finally, the bootstrapping analysis is more biased to a positive result than to a negative one in the next year.

In any case, figures only show probabilities, not certainties. In a short-term vision, following the day-to-day signals is relevant. In our long-term perspective, the relevance of this analysis is relative to the moment in which the investor thinks to rebalance his or her portfolio or decide to change the assets he or she invests in.