A few months ago, my analysis warned you that the market would correct from September 1 into late October. In recent analysis, I’ve warned that the Dow Jones could see another correction in November. My view on this hasn’t changed, and I’ll explain why below…
It’s hard to overlook the bullish momentum of the US Dow Jones; it’s simply relentless.
While the ASX 200 has returned 7.5%, the Dow is up close to 9% since its October low market close. Keep in mind that this is a 9% gain in less than three weeks. The bull is simply unlikely to keep stampeding at this rate in the ultra-short term.
The big picture story is different. I’ve said time after time, we’re in the midst of what could be the biggest equities bull market in history. Thanks to institutions switching from debt to equity markets, the Dow Jones will be exceptionally bullish next year. It should lead the ASX 200 higher in 2015.
I say ‘should’ because, as it has this week, the bullish US Dollar could dampen the Aussie party. That’s only if a stronger US dollar hurts commodity prices too much. I explained in September why the US dollar is the greatest risk to commodity prices in the years ahead.
The US dollar Index shows the strength of the greenback against a bunch of currencies. Last Thursday, it closed above 88 cents (now: 87.59 cents), at a four and a half year high. My analysis shows that it could hit US$1.20 in the years ahead (likely to be hit in 2016).
Commodity prices were up across the board as the greenback hit its recent high. Similar to 2007, the bullish stock market next year could just drive resource stocks and prices higher. Recent Indian and Chinese policies would likely strengthen this rally. I’ve talked extensively about these policies in Diggers and Drillers in recent weeks.
But there’s one asset I’m not backing next year — precious metals.
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$1,169.80 per ounce. I’ve shown Diggers and Drillers reader’s monthly analysis on gold and silver — this will continue.
In fact, before it moves into the next phase of the bull market, I’ve shown my readers how it’s possible for gold to fall to US$817 per ounce next year. Check out the publication if you’re interested in reading the ongoing analysis.
2015 will be a year when punters hunt for yield.
Debt (i.e. bonds) offers yield but is exceptionally dangerous. As I said last week, US$1 trillion of bad debts now exist in the European banking system. These debts are likely to never be repaid.
Athens has huge debt — and political — issues that continue to give markets a real headache. For this reason, institutions are starting to see Greek debt as ‘too risky’ and are selling bonds. As we speak, Greek 10-year bond yields are hovering at 8.2%. This is very high. Spanish 10-year bonds are yielding 2.14% — and Spain is equally bankrupt.
The bottom line is that debt markets are dangerous — Europe is bankrupt. And gold doesn’t offer yield. It will be sold off to below US$931 per ounce next year as the US dollar makes new highs.
The only game in town is equities.
Now I’d like to reflect briefly on something I wrote a fortnight ago:
‘US Mid-term election results will be out mid-next week. It’s expected that the Republicans (friendly towards to banking sector) will gain control of BOTH the house and senate.
‘If Republicans win control of both chambers of Congress, President Obama (Democrat) will have a hell of a time trying to lead the country. Obama’s popularity rate is at an all-time low of 44%. Obamacare has turned out to be a nightmare. Financial markets, especially the banks, will see it as good news if Obama has less influence on passing law.’
Well, the Republicans took over both houses in commanding style. Obama and his 39% approval rating can play golf whenever he wants now that the Republicans are control Congress.
The Dow Jones bounced 100 points on the news. Importantly, it smashed through the resistance level of 17,415 points that I mentioned a fortnight ago.
But the bullish momentum has slowed last week, giving me reason to believe that a correction is still on the cards. Will it come this week or the next week is what I’m wondering…
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 week.
Source: Diggers and Drillers; Freestockcharts.com
Understand that we’re in the midst of a massive equities bull market. And there’s a long way to go until we get to the top.
The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011. The Dow has just broken through upper resistance of the channel line. This trend dates back to the downwards stock market break in October 2008.
Considering the bullish trend, technically, the Dow Jones could see a run up to roughly 17,750 points this week. This would see it hitting the pink upwards trend line, starting from the 2013 end of year low to the September 2014 high.
There’s a possibility that it could continue rallying from 17,750 points. The much anticipated debt to equity market switch may be underway as we speak — hence the relentless bullishness of the US stock market.
But I’d expect the Dow to reverse shortly…
Bullish momentum is slowing. As demonstrated by last Friday, the Dow increased only 0.11% to close at 17,573.93 points. And we’ve already seen a 9% run since the October low. In this case, we’re at risk of returning to 17,000 points soon. 17,000 points is the MAJOR support and resistance level for the Dow Jones.
I wouldn’t be surprised to see the market retest 16,750 points later this month or in early December. 16,750 points reflects the 61.8% Fibonacci retracement level.
We have a big month ahead. It’s important to note that the US didn’t truly start its recent correction until the third week of September. And with the US elections out of the way, the November correction could hit us as soon as this week.
I’d expect that, once the debt issues are dealt with in Europe, which I explained above, the US dollar strength should subside temporarily. And this should see the US stock market start to sell off.
This event is also likely to come in the next two weeks. And, although the trend is down and heading towards US$931 per ounce next year, this should also see a short term relief rally in gold.
At the same time, December 31 is the end of financial year in the US, which means many hedge funds will unwind their worst positions, so we should see some tax selling in November.
This year’s tax selling season comes at a great time. The Fed won’t print money this month. It has halted its money printing program…for now anyway.
For now, keep your eyes open and hang onto your hats. There may be another chance to buy cheaper stocks in the month ahead…
Resources Analyst, Diggers and Drillers
Ed note: The above analysis has been updated since its original publication last Friday in Money Morning.