The Dow Jones: What Does the Coming Bull Market Mean for Resources?

The correction which I warned you about seems long gone. However, keep in mind, the Dow won’t only see blue skies from here. I’ve said for a while now that I expect a minor correction. I gave more details on what you should expect in last Friday’s Money Morning.

That said, you may have wondered where I see the Dow Jones trading by the end of next year. And importantly, what does this means for resource stocks? Let’s face it…a large amount of stocks on the ASX do have resource-based business models.

Diggers and Drillers readers received significant analysis on the questions above this week. Today, I’ll give you a brief summary of what was discussed.

The European sovereign debt crisis is on the horizon. Governments are bankrupt and we’re witnessing the final stages of a government bond bubble.

The euro and yen will be sold of heavily next year. Japan and Europe are two of the largest capital markets in the world. The bullish US dollar rally will set the scene for the coming collapse in the European Sovereign debt markets — destined to blow up within the next couple of years.

Because of this, you’re about to witness a gigantic, global capital shift from the US$160 trillion debt market to equities markets (one third of the size of the bond market). The bullish US dollar and the thirst for yield will see gold sold off next year, sending more money into the stock market. And, thanks to the IMF, cash is no longer a safe option.

This bull market has absolutely nothing to do with company fundamentals anymore…even central banks see the risks and are buying equities. As they say, don’t bet against the Fed!

Keep in mind, the bullish US dollar is what’s driving the Dow Jones upwards.

Technically, the Dow Jones could be trading at 26,100 points by the end of next year. Check out Diggers and Drillers if you want more details on why.

The Aussie market should follow the US, climbing higher next year. 2015 is set to be the new 2005 in the stock market. 2005 saw commodity prices bottoming…and resource stock valuations started to take off. And if you pick the right stocks, you can outperform this bull market.

Nonetheless, it won’t just be blue skies and cocktails for commodity stocks next year. The US dollar bull market will have huge implications for resources.

Mathematically, commodity prices will have to decline when the US dollar rises, because prices are denominated in US dollars. Next year will be a tough year for many sectors. Precious metals (gold, silver, platinum, and palladium), copper, crude oil, iron ore, coal — to name a few — will get smashed across the board.

You can expect a number of resource companies to go under in 2015. Even the survivors will be in a lot of pain. The fact is, resource company balance sheets are not pretty.

It may shock you that a resources analyst is this honest. This fact remains: Diggers and Drillers and Money Morning aren’t stock broking publications. Stock brokers are paid to be bullish; I’m paid to be honest and thorough.

2015 will be another tough year for many, though not all, resource punters.

Some resource companies will still outperform in the 2015 equities bull market, despite the destruction in commodity prices thanks to the bullish US dollar. Because I’ve seen what’s coming for several months now, I’ve been able to prepare my readers for next year.

I’ve spent hours of research strategically selecting stocks that have the best chance to outperform in the coming 2015 equities bull market. I must say, this hasn’t been an easy task…

Enthusiasm and irrational exuberance is about to be reborn. This should help some resource companies see an earnings valuations lift as confidence will comes flying back into the stock market. Some quality smaller resource companies are also set to outperform next year.

At the end of the day, you must keep in mind that this is a government bond bubble.

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.

The smart money is selling bonds and buying equities. 2015 will be a year when punters hunt for yield.

Gold doesn’t offer yield. And it will be smashed by the bullish US dollar.

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$1,227 per ounce. I’ve shown Diggers and Drillers readers a detailed monthly analysis on gold and silver. If you’re interested in knowing where gold is heading in 2015, click here.

The only game in town is equities.

Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week.


Source: Diggers and Drillers; Freestockcharts.com
Click to enlarge

The chart shows you 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 time period. Once the Dow moves above the upper blue channel on a weekly close (18,160 points), it’s game on for the 2015 equities bull market.

For now, 18,000 points seems to be the psychological barrier to break.

Thanks to the further decline in the crude oil price, the Dow Jones has been choppy at best this week. Falling crude and the lack of enthusiasm to breakout has seen the Dow trade lower at 17,596 points. This is loss of 2.2% from last Friday’s high of 17,991 points. And not something that I’m about to lose any sleep on…

Tonight’s close on the Dow should set the scene for next week. If it’s a green close, I wouldn’t be surprised to see the market back up and testing the 18,000 point level next week. A red (lower) close could see the Dow trickle lower next week.

A strong green close is a real possibility.

The European Union seems to have ‘sorted’ — of course temporarily — Greece’s debt troubles. The Eurozone creditors have granted Athens another two months after the end of this year, when its €240 billion ($297 billion) emergency support program was due to end.

But Athens Prime Minister, Antonis Samaras, has delivered a bombshell. He said Greece would rather default than repay hundreds of billions of euros in bailout loans. This has seen social unrest skyrocket in the capital this week. At the same time, Greece’s stock market saw its worst one day loss since 1987.

Welcome to the Eurozone. Politicians and lawyers are destroying the European economy and defying the will of the people. We’re seeing the destruction of the European Union and the euro playing out in real time. 

Another bullish case for the Dow Jones is the crude oil price. It’s now trading at US$59 dollars per barrel. Given the steepness and momentum of the decline of the crude oil price, we could see a big bounce in the coming weeks. This should see equity markets higher.

Nonetheless, the market may choose to take a breath and close lower this week. I’ve always said that the market can’t go up in a straight line forever.

Major support exists around the 17,150 points level. This is shown by the red horizontal line and represents a minor 5.5% fall from this level, or 18,160 points.

If the Dow sees a close below 17,150 points on the weekly level, we could see a return to a major correction and fall towards the 16,500 level, at worst. This would be a 9.1% correction. Given the fundamentals, I highly doubt that an extended correction will happen.

But focus on the prize — the market is extremely bullish and sometime soon, you’ll see an explosive move to the north. The fundamentals are there to back the Dow going significantly higher next year. And there’s a good chance that we could see a multi-year raging bull market from here.

The bottom line is that the Dow is making a very bullish setup for 2015. The Aussie market should follow. But the bull market will see both ups and downs.

Jason Stevenson+
Resources Analyst, Diggers and Drillers

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3 responses to “The Dow Jones: What Does the Coming Bull Market Mean for Resources?

  1. The free report early this year stated Iron Ore was set for a good year, Now the price has almost been cut in half. And your gloomy on the price in 2015.

    What has made you change your mind within the last 12 months ?

  2. Just curious, Early 2014 you had a free resource report. An extract of this report below.

    Kris: OK, if I had to pin you down to the three or four commodities you think would
    perform best over the next 18 to 24 months.
    Jason: Well, with my back pinned against the wall I would have to go with oil and gas,
    gold, iron ore and uranium.

    What has changed your mind in regards to Iron Ore & Oil….

    It is a little like Kris Sayce prediction about house prices and a few years ago when silver was going to $200 an ounce.

  3. Hi Ben,

    That free report was written in early 2014. It’s important to realise that markets change over time. And a lot has changed in resources over the past twelve months.

    Check out Diggers and Drillers to find out my views on oil and gas. I’ve written extensively on the topic over the past couple of weeks. Same goes for iron ore, which I’ll be talking about again within the fortnight.

    Apologies, I can’t add too much more here.

    Cheers
    Jason

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