THE INVESTMENT STRATEGY BLOG

CURRENT MARKET COMMENTS: Higher oil prices to the rescue. 
11/4/14  I had thought (and still do) that the stock market in the United States could be entering a “distribution stage” (TOPPING), above the 17,000 area. However, with oil below $80.00 a barrel, the Dow Industrial Index, the Dow Transportation Index, Dow Utility Index, S&P 500 and the NASDAQ all made new highs. Lower oil prices is an economic stimulus that helps consumers and companies that use energy, like airlines and manufacturing. This is an unexpected stimulus package gift wrapped my Saudi Arabia and aimed right at Putin’s pocket book. The Saudi’s production cost is at about $10 a barrel, so they can afford to do it, while US energy company costs are much higher, so US energy stocks are down.
World markets seem to be  in an intermediate downtrend, reflecting an economic slowdown in Europe,  and slow growth in China. Lower oil prices and a stimulus program are temporarily (my opinion) helping  the Japanese markets. However, world wide economic conditions do not appear as healthy as in the US and could eventually drag our economy down. Recent third-quarter earnings reports have shown 70% of the companies are showing better than expected earnings, although the S&P price earnings ratio is a high 19 times earnings.
The election should not be a factor tomorrow, because either way, I expect continued Congressional gridlock.
 
INVESTMENT STRATEGY: Lighten up during rallies
The markets have steadily risen since 2009 and investors have been trained like Pavlov’s dog to not worry about setbacks. Stock markets tops and the beginning of a Bear Market happen when it is least expected. I tend to be suspicious when euphoria and hubris reach high levels ( I just got back from NY City and the euphoria is unbelievably high.) That happened in 2000 and 2008 after which the market corrected 50% of its gains in a very short period of time.

So what could go wrong? There are two bubbles that I am concerned about. 1) All economic growth in last 20 years has gone to the top 1% in the US and to the top 80 people who control 50% of the wealth in the world. There is nothing wrong with accumulating wealth; however its effect on the general economy could make future economic growth unsustainable. How many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions have taken the breath out of the economy for consumers and sooner or later will affect the entire economy negatively.  2) The FED has stopped its stimulus package of buying bonds.  Investors who have high-yielding bond mutual funds have immediate liquidity. However, the managers that hold these funds in high-yield bonds, have much less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the Bank of China, 40% of the State Bank of India and close to 30% of some Spanish banks. This is not a problem during the good times like now and when the stock market shows higher highs. However if the Fed starts raising interest rates and the stock market starts to fall, this could cause a problem with high-yielding bonds that are not very liquid, which could cause a precipitous drop in in high yield bond prices. ‘Junk bonds’ can suddenly become a new name for these high yielding bonds. Markets hate lack of liquidity!

As always, I will let the market tell me what to do, using my technical methodology outlined in Investment Strategy Handbook for Volatile Markets.(My book). If we start seeing new highs, the Dow could go up to about 18,000 by year end. To me,the market looks like it is running out of breath for 2015. If the market starts making new lows, there isn’t any intermediate down side support until around the 15,000 area. Stay tuned!

Current Value 11/4/2014 Dow NASDAQ S&P 500
17,383+17.60 4,623-15.27 12,012-5.71
Short Term UP UP UP
Int. Term Up Up Up
Long Term UP UP UP
Forecasted Trends DJIA NASDAQ S&P 500
Short Term UP UP UP
Int. Term ? ? ?
Long Term Sideways Sideways Sideways
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 17,410 4,654 2,024
Short Term Down (Support) 15,855 4,116  1,820/1814
Int. Term Up (Resistance) 18,062 5,002 2,486
Int. Term Down (Support) 15,356/14,688 3,986/3294 1,560
Long Term Up (Resistance) 18,974 5,132 3,044
Long Term Down (Support) 50%12,025  62% 10,750 50%2,958 62% 2,555 50%1,390 62% 1,177
   
       

Carl M. Birkelbach

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