Just a quick reminder before we get started about some exciting changes ahead in 2017.
Starting on Tuesday, 3 January — our first new edition following the holiday break — I will be writing for our sister publication, Markets and Money. Along with co-editor Vern Gowdie, I’ll continue to call it like I see it, bringing you all of the latest resources news and global investment insights you’ve come to expect.
That means you will no longer see me leading off here at Money Morning. Don’t worry though. We’ve got a great editor lined up to fill my shoes over here.
To follow me at Markets and Money, you can simply click here. I hope to see you over at Markets and Money in the New Year.
Now, let’s take a look at markets.
I hope you’re not bearish!
The US stock market’s delivered a seven year bull market. The Dow Jones Industrials Index is up 13.9% for the year.
The ASX 200 hasn’t had as much fun. It’s only up about 5%.
It shouldn’t be a huge surprise…
Remember, our stock market’s driven by commodity prices and the banks. That’s not great news. Despite a few promising sectors, the resources bear is still alive and kicking. The banks have been boring, volatile, and delivered mixed messages all year.
There’s plenty of money on the sidelines. The majority are waiting to see what happens, and fear a major stock market crash.
Are they right to?
Who’s right: the bulls or the bears?
The ‘Trump rally’ delivered the biggest post-election run in history. The Dow Jones is up about 8.7%.
With the stock market steaming ahead, should you buy or sell?
Vern Gowdie, Editor of The Gowdie Letter, believes you should sell everything and go to the beach. Vern is a major stock market bear. He believes a historic stock market crash is on the cards. Vern’s arguments are worth noting. Take a look for yourself, here.
Phil Anderson, our resident property and cycles expert, will say you’re crazy if you don’t own stocks. Phil’s believes the stock market isn’t even close to peaking. Check out his work, here.
I recommend keeping an open mind on both views…
In May 2010, when the Dow Jones was hovering around the 10,000 level, Jeff Miller — president of NewArc Investments — wrote on his blog:
‘Someone needs to say this: Dow 20K.
‘The Dow will double before it is cut in half. I want to make this proposition right now, with the Dow around 10,000 and many forecasting 5000. … For the moment, let me just say that it is shorter — much shorter — than most people would think’.
At the time, the majority of people would have laughed at Jeff’s view. Yet, financial markets are nearing that level now. To think, Jeff Miller believes another 10–20% gain is possible.
Wells Fargo strategist Scott Wren, who correctly called the Brexit and post-election rallies, thinks differently. He believes the market is trading at ‘fair value’. Wren said last week on CNBC’s Futures Now:
‘This market is trading on the fundamentals over the next 6 to 12 months. It would’ve been trading here, or very close to here, whoever had won the election.’
That’s a possibility. The markets were flat into the election purely on uncertainty. Once we knew the result, the markets took off.
Scott Wren believes people could face inflation, wage inflation, and three potential US rate hikes next year. In his eyes, anything more than two rate hikes could trigger a bond rally. Wren thinks that would worry investors and keep the stock market flat next year.
Fundamentally that doesn’t really make sense. Higher interest rates should deflate the bond bubble through rising yields. That said, when yields surge higher, investors could get worried about a potential financial crisis and sell stocks with bonds.
The question remains, when should the stock market start to turn?
Take a look at the monthly chart for the Dow Jones Industrials Index:
Source: Tradingview.com; Resource Speculator
Click to enlarge
The top blue line shows the breakout line and highlights the 2016 low. It shows the projection of the current rally, and the next target in sight. That stands around the 21,000 point level.
I doubt we will see 21,000 points before a correction. That’s more likely to happen next year.
The stock market may have peaked last week on the pink breakout line. That shows the projection of the current rally and highlights the November low. In that case, unless we take out last week’s high or the Bank of Japan scares the market, the US stock market may consolidate into the New Year. The correction could play out at the start of next year.
How low can stocks go?
The lower blue lines are parallels of the top blue breakout line. They are drawn from the 2016 major lows, and have acted as important support and resistance for much of this year. Assuming a correction, the parallels should act as a nice target. That sits around the 19,000 to 19,600 level for now. That may be the extent of the correction!
That said, a break of that range should trigger a correction to the lower 18,000 zone…
The 18,000 zone is shown by the black channel. The lower black line highlighted the May low, and acted as strong support and resistance. The upper black resistance line is a parallel of the lower black break line. It acted as strong resistance, until the Trump rally.
A stock market correction is almost a certainty. However, the technicals show plenty of support into the 18,000 zone. So, don’t expect a major sell off just yet. If the US stock market pulls back, expect the Aussie market to follow.
I’ll update you on the story next year. Remember, starting in 2017 I’ll be appearing in Markets and Money. To follow me there, just click this link for your free subscription. No need to do anything else.
Resources Analyst, Money Morning