US stocks reconverge with "six-bear average"
Simon Ward
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Following its recent rally, the Dow Industrials index stands only 2% below the "six-bear average" path discussed in previous posts, based on recoveries after previous large US stock market declines – see chart.
A post in May speculated that tighter global liquidity would push the Dow, then trading in line with the average, into the lower half of the six-bear range, thereby presenting a buying opportunity. At the trough in early July, the index was 10% below the six-bear mean and only 1% above the bottom of the historical range.
Liquidity indicators have improved at the margin but have yet to turn positive, suggesting that the Dow will struggle to move above the six-bear average. G7 real M1 expansion is still well below industrial output growth in year-over-year terms but is close to converging on a six-month basis. The G7 monetary base has been moving sideways after falls in the spring and summer, with an increase possible if the Federal Reserve embarks on "QE2" and / or the Japanese authorities conduct further unsterilised currency intervention.
The six-bear average moves gradually higher over the remainder of 2010, finishing the year 6% above the Dow's closing level on Friday.
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