We find ourselves faced with Global Market Uncertainty as long term trends begin to show signs of weakness. Changes in the direction of long term trends can and will change the investment landscape for decades to come.
As I pointed out in last month’s article, the long term downward trend in interest rates may be nearing a turning point. While markets appear to zigzag up and down randomly they generally follow a predictable pattern. In a strong uptrend we typically see each new “zig” up to be higher than the previous “zig” up and each new “zag” down higher than the previous “zag” down. In a strong down trend we see the opposite, lower high points and lower low points.
The first indication that we may be nearing a trend reversal is when we see the zigzag pattern violate the direction of the larger trend.
If you follow the chart below from its low point in 1949 you can see that each new high point is higher than the previous high and each new low point is higher than the previous low. In 1961 you can see that the zigzag pattern was violated when interest rates failed to rise above the 1958 high point before turning lower. But the low point in 1962 did not drop below the low point of 1960 so the trend reversal was averted.
In 1981 the major trend did change direction and we have been seeing lower low points and lower high points all the way up through 2011. But the low point in 2011 was higher than the low point in 2008 and rates have since risen just shy of the trend line. Are we seeing a major trend reversal unfolding? We should know very soon. If rates turn lower at this point we should hear a collective sigh of relief in the bond markets. If rates continue to move higher, fear will begin to rise exponentially as bond investors run for the hills.
We find ourselves in a similar situation in the U.S. stock market. As we teeter near the peaks of 1999 and 2007 which way will the market go from here? Is the global economy beginning to improve or are we on the brink of another collapse?
Clicking on the charts above will provide a larger view.