DOW JONES AT RECORD HIGHS. IS THIS THE BEGINNING OF A BULL MARKET OR AN UNSUSTAINABLE MOVE?
Forget about the falling oil prices and the oversupplied global market.
Forget about the Brexit vote that would bring the Apocalypse on Earth.
Forget about China and its sluggish economic growth.
Forget about fragile European banks.
All these were nightmares that belong to the past.
For the last seven days we watched US stocks making great gains, reaching and maintaining all-time highs. So is the U.S. and the global economy so superb? Should we bring out the lollipops and pretend we are in paradise? Or are we heading to the candy mountain and we will soon lose our kidneys?
Chart Analysis
From a technical point of view, the monthly chart of Dow Jones Industrial shows that the upward trend line still holds. We had an ABC correction and now the market is heading for an upward break which is a bullish indicator.
Fundamental Analysis
On the other hand, we didn’t have such superb earnings that justify new record highs. The truth is that banks' earnings beat market’s expectations but the reason was that the benchmark was set very low. So why the market is so confident? The answer is further monetary stimulus. Yes! As always the central banks will jump in and give the solution. So the market is pricing it. In addition the US economy seems to be the best house in a bad neighborhood so all the excess liquidity is transferred there.
But I believe this rally is close to be over.
The central banks don't seem ready yet to provide the extra stimulus the market is pricing. They keep this weapon for future use or if the markets become nervous again. Moreover, since the US economy is recovering I won't be surprised to see talks about another rate hike. This event might have a negative impact on the global economy and might trigger a fast correction of the Dow index back to 17,500 points.
So my advice is to avoid entering the equity market until the dust settles down and the central banks eventually fire their ammunition.