The Dow Jones: Correct Now or Blast Off

On August 29, I warned you that the market would correct from September 1 into late October. Again I warned you that we could see a return to a correction in late October. The ASX 200 is down roughly 3% this month — this seems reasonable considering the selloff in the iron ore price.

Right now feels much like what happened in September. Whilst the Aussie Market got smashed, the Dow Jones held up reasonably well…at least until the third week of September.

This is why, thanks to end of year tax selling, I’ve been confident that the Dow Jones would see another return to a correction at around the third week of November.

Well the third week has come and gone. And the Dow Jones has done anything but correct. The Dow’s been totally flat, but at least it’s still showing some signs of life. Although, it has been in a coma for nearly three weeks now.

But whether the market corrects or not shouldn’t concern you. As I’ve told you before, the Dow Jones will rocket next year. And this alone should lift the Aussie market. A falling Aussie Dollar will aid the bull market for Aussie punters. I wouldn’t be surprised if we are looking at 75-80 US cents at the end of 2015.

You may be wondering why I’m so bullish.

Last week I showed you how France is bankrupt and will default (or delay payment) on its debts within the next three years. Portugal, Italy, Greece and Spain will also default on their debts.

Even Germany and other countries may not survive what’s coming. Germany grew 0.1% last quarter — so much for being the strongest economy in Europe. And German banks own foreign debt across multiple European countries. Furthermore, multiple European countries owe Germany money.

All this is starting to see a gigantic shift from debt to equities markets.

Maybe you’re thinking I’ve lost my mind… Surely these governments won’t default on their debt obligations. They have to pay pensions, and governments can just borrow indefinitely.

I’ve got news for you…

Government debt defaults have happened multiple times in history. For example, France and Spain defaulted eight and six times respectively between the sixteenth and seventieth centuries. Back then these were two of the richest economies in the world — much like the US today.

In fact, it was the government debt defaults that made the Great Depression worse in 1931. Take a look at the following table and see which countries defaulted around this time:

Source: The Great Depression of the 1930s: Lessons of Today

Many European countries delayed payments and cut interest payments. The United Kingdom, Europe’s largest economy at the time, cut the interest payment on its war bond from 5% to 3.5% in 1932. Greece, and others, imposed a moratorium on paying their outstanding foreign debt in 1932. Greece defaulted on its debt in 1964 — nearly 30 years later.

If you buy a government bond and they cut the interest rate or don’t pay it back to you on time, this is technically a default. It’s like a bank phoning you up and saying, ‘we need you to pay your 30-year mortgage in full by tomorrow and, by the way, the interest bill has gone up.’   

As I pointed out last week, we’re in the midst of a gigantic GOVERNMENT BOND BUBBLE. Now governments are far more leveraged with foreign debt than they were in 1931. In this case, they’ll fall even harder when they do default.

The collapse of socialism is coming very soon. This collapse has begun with the financial meltdown of 2008/09…however, government bank bailouts have prolonged and added to the problem.

Governments are bankrupt and won’t look after you in the future; plan to look after yourself. They think they can fix any problem by raising taxes, increasing capital controls, and tightening regulation (like trying to regulate the internet). This is killing growth and driving unemployment higher. But your fearless ‘leaders’ don’t see what they are doing here…all they want is more power and control.

Institutions, pension funds and the rich are getting as far away from government bonds as possible — and selling the banks that hold them. Smart money is going into equities to hide and earn yield. This is pushing the US stock market to new highs. And this will be the case even more next year, and the ASX should follow right along.

We’re on the cusp of a gigantic switch from debt to equity markets. I’ve been preparing Diggers and Drillers readers for this all year. I’ve been recommending quality resource companies that should outperform in the coming bull market.

Quality small cap companies should also outperform. My mate Tim Dohrmann, analyst at Australian Small-Cap Investigator, has recommended some absolutely ripper companies that should outperform in the coming 2015 bull market.

2015 will be a year when punters hunt for yield.

Gold doesn’t offer yield.

When gold was trading at US$1,350 per ounce in early August, I explained to you how it’s falling to US$931 next year. It’s now trading at US$1,195.30 per ounce. I’ve shown Diggers and Drillers readers monthly analysis on gold and silver — this will continue. Have a read of the publication if you’re interested in following my analysis on gold.

The only game in town is equities.

Now let’s look at the technical bigger picture to help explain this story. The chart below tracks the Dow Jones Industrial Index. Each bar represents one day.

Source: Diggers and Drillers;

The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011. The Dow has broken through, and held, the upper black resistance of the channel line. This trend dates back to the downwards stock market break in October 2008.

So what now?

I’ll give it to you straight. If we don’t see any correction in the US next week, we could be looking at blasting off the 17,719 point level into December. This should bode well for the Aussie market and lift it into the 2015 bull market.

Currently, the Dow Jones is treading nicely along the upper purple resistance line. A decent breakthrough of this resistance level would likely mean BLAST OFF for the Dow Jones.

I’ve said before that, considering the bullish trend, technically, the Dow Jones could see a run up to roughly 17,750 points. This would see it hitting the pink upwards trend line, starting from the 2013 end of year low to the September 2014 high.

17,750 is important resistance. If we break and hold this by a weekly close, it’s game on for equities. We’re very close to this level now, and next week is the last chance for the Dow Jones to reverse. Once the Dow Jones starts to blast off, I’d expect to see gold underperform again.

For now, keep your eyes open, and hang onto your hats. We’re at a critical juncture — correct now or blast off.

Jason Stevenson,
Resources Analyst, Diggers and Drillers

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Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

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