On 27 of January in Markets and Money I said, ‘expect the market to break 18,500 points sometime in mid to late February…with the Aussie market to follow’. Indeed, this big move didn’t happen.
What’s going on? You may be shaking your head, thinking that my 26,100 point target by year’s end is simply a joke.
The fact is you must understand the issue at hand.
Look at the debt issues that Greece is experiencing right now. It’s only a matter of time until Greece’s issues spread to the rest of Europe, and then globally — all governments are bankrupt. The coming sovereign debt defaults in 2016/17 will drive the massive debt to equities switch.
For now, a degree of confidence and hope remains in most governments and in the world economy.
That said, it’s clear that buying enthusiasm has weakened considerably. The Dow Jones has returned only 3.5% since I said that the bull market would start on 22 January 2015. On the other hand, the Aussie market is up 8.9% since then. You can thank the lower Aussie dollar and RBA interest rate cut for much of that.
Equities aren’t the only investment class which have seen risk appetite wade. Government bonds have been sold off globally. Commodity prices have been relatively anaemic. And gold has been hit hard; falling by roughly US$100 per ounce, as I warned you it would a few weeks back. It’s currently trading at US$1,200 per ounce, fast on its way to the US$931 per ounce level.
On a side note, I’ll be updating Diggers and Drillers readers on gold tomorrow. If you want to check out my analysis, click here.
Although financial market conditions are riddled with future uncertainty at the moment, we’re about to enter a four month period that will see the Greek issue cool down. Financial market clarity is coming. Greece just won a four month debt extension from its creditors. However, one sticking point remains — the IMF debt repayments that Greece must pay this month.
Most of this issue should be sorted out tonight (during European business time)…
Kris Sayce, Editor of Tactical Wealth, has explained to Port Phillip Publishing readers that Greece intends to ‘steal’ its citizen’s pensions to pay the IMF debt bills — the lower gold price is even signalling that this will be the case. As such, Athens is only delaying the inevitable — exiting the Eurozone and defaulting on its debt payments.
With the Greece issues out of newspaper headlines until the problem resurfaces around June, the near term future for financial markets seems clear.
We’re likely to see bond prices rise and yields decline (inverse relationship). You can thank the European Central Bank (ECB) for this. As I’ve explained in the past, the ECB buying 60 billion euros worth of bonds per month until September 2016 is only fuelling the bond bubble. Last Thursday night, the ECB said it will start its US$1 trillion money printing program tonight.
Bonds will become the best short term play over the next few months. Whilst, fundamentally and technically the stock market is due for a major correction. Remember, we haven’t seen a correction of more than 10% since 2011.
Why am I so certain a correction is coming?
First, overinflated oil stock price valuations are due to get hammered. I analysed how to play the oil sector at length in Diggers and Drillers this week. If you own any energy or LNG stocks or are planning on buying some, it’s worthwhile checking out my analysis here.
Second, you’ll see negative economic numbers coming out of the US due to the harsh winter. This winter is worse than last year, which saw the stock market pull back.
Finally, you’ve got the ‘delayed’ extension of the Grexit, which will return to front page news heading into June, making the market nervous once again.
These factors will drive a 10–13% US stock market correction in May/June. The Australian stock market will follow and likely experience a larger correction.
I expect the correction to start during the final week of this month. But first, the stock market will receive a final boost from the IMF/ Greece deal and the ECB money printing program starting tonight.
Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week. (Note that this chart was published in last Friday’s Money Morning).
Click to enlarge
Source: Diggers and Drillers; Freestockcharts.com
Back testing the above chart shows that the Dow Jones has been in a strong bullish uptrend since 2011. The blue channel lines have held the Dow’s trading pattern relatively well over this period.
The upper blue trend line must be broken for the Dow Jones to hit my target of 26,100 points by the year’s end. We won’t see that breakout until at least June. This will represent a resistance level of roughly 19,000 points in May/ June. Keep in mind, the Aussie market should follow the lead of the US.
At the moment, we’ll likely see a sharp rally to the black trend line of 18,480 points. The buying momentum may push the stock market slightly higher than this level. This corresponds to the ASX 200 bouncing just above 6,000 points in the near term.
But remember, the correction is coming over the duration of the next two to three months. First we’ll close below the red trend line on a weekly basis. Whenever this has happened since 2011, there’s been a correction. The last time this happened was from October to November of 2014. If you were following Money Morning you may recall I warned you that correction was coming.
This time, the correction will be worse and we’re likely to revisit the lower blue trend line, shaking out all the nervous nellies from the market. In May/June, this support level will represent roughly 16,850 points.
However, I believe that it’s highly likely that we’ll decline further than the lower blue trend line. We could see the market return to 16,750 points around May/ June (dotted line).
On another level, it is possible to revisit the 16,000 point level (pink line) on a maximum down move. This would see the market line up with the 2009 GFC and 2011 correction market lows.
The point is to get ready for a 10–13% correction as we head into May/June. When that happens, the mainstream news headlines will be calling for a 50% correction. Don’t panic. They have no idea.
Once we get into the mid-16,000 level, you should buy stocks. From there, we’re going to bounce extremely hard on our way to 26,100 points by year’s end. The Aussie market should follow.
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