I’m wildly bullish on the stock market.
In fact, the last time I wrote about the Dow, I showed why it could go to 21,000 points by the end of 2014. If not, then certainly by June 2015. Interest rates are far too low and the search for yield remains intact.
Saying this, it’s likely that the Dow Jones is due for a mini-correction around September this year. A lot of money is sitting on the sidelines waiting for this to happen. When it does, the Dow Jones should climb to new highs. I’ll come back to this in a tick.
The Dow Jones Industrial Average (DJIA) is a favourite gauge for the US stock market. It’s probably the most widely recognised stock index in the world.
Despite the growth of other economies, such as China, whatever happens in the US markets usually has an impact worldwide. That’s what happened during the financial meltdown of 2008-09.
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That’s why I follow the US stock market carefully. And based on the charts, a cooling off period is on the way.
To explain why, let’s take a look at the technical picture. The chart below tracks the Dow Jones. Each bar represents one week.
The chart above shows that the Dow Jones has been in a strong bullish uptrend since 2011. That was the last time the Dow Jones corrected by more than 10%. Many market ‘experts’ have been calling for another stock market correction since then. So far they have been wrong every time.
Saying this, I now reluctantly agree with the experts’ view.
The stock market is at risk of a correction. My analysis suggests that the market could see a ‘fake’ correction of between 6.5% and 9% around September this year. In fact, because the market tends to overreact, the correction could go beyond 10%.
But it will only be a ‘fake’ correction. By that I mean the correction won’t last long.
The above chart shows the Fibonacci sequence lines from the correction bottom to today’s market high. Clearly you can see that each Fibonacci level has been an important support and resistance level since 2011.
The momentum is relentless. But there are three reasons why it’s due for a slowdown.
First, as I mentioned before, the Dow (and S&P 500) hasn’t had a decent correction for over 1,000 days. The 1,000-day mark is the fifth-longest streak without a correction since 1928. The longest run on record without a 10% correction was 1,127 days. That was between July 1984 and August 1987.
Second, the market typically sells off in September. This is a major time-point when options expire and when US pension funds sell stocks to pay retirees. In fact, since 1990 the Dow has fallen 20 times or 83% of the time in September. Considering the extent of this rally, the pullback will likely be more than 2011 when the Dow fell by 6.41% in September.
Last of all, and as boring as it sounds, September is a huge month for Europe.
This is the scheduled release for the European bank stress test results. I don’t expect good results. But the banks are currently raising large amounts of capital from shareholders. Adding to this, the European Central Bank’s money printing program comes into full effect around this time.
These steps should Band-Aid the true economic wounds in Europe. But this Band-Aid will lose its sticky side and will one day expose the wounds. Maybe by the end of next year?
However, once the market corrects, the market should return to new highs.
The potential for a sell-off is why in Diggers & Drillers I’ve focused on quality resource companies that have the best chance to withstand the correction and potentially outperform when the market rallies.
Jason Stevenson+
Resources Analyst, Money Morning
The post The Stock Market Correction That’s Coming in September 2014 appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
