A few months ago, my analysis warned you that the market would correct from September 1 into late October. In recent analysis, I’ve warned that the Dow Jones could see another correction in November, starting in the third week. My view on this hasn’t changed, and I’ll explain why below…
First, it’s important to remember that we’re in the midst of a gigantic bull market in stocks. This will only pick up momentum next year.
We’re on the dawn of a gigantic shift from debt to equities markets — this will really blow your mind. It’s now a question of when, not if, this move will start to explode. The impact will drive the US Dow Jones to an all-time high that many punters can’t possibly fathom next year. The Aussie market should follow.
I’ll explain what’s going on here.
The debt to equities market switch is brewing thanks to the Eurozone — a political and economic basket case.
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Europe is working on an economic model that includes: deflation (falling incomes), next to zero economic growth, growing debt and high unemployment. But don’t worry, as long as they keep raising taxes, everything will be alright and socialist governments will still be able to pay their pensions.
The fact is this: Portugal, Italy, Greece, and Spain, (the PIGS) are all bankrupt. They will default on their debts in the next three years. And this will have enormous implications for gold and equity markets, which I’ve been explaining to Diggers and Drillers readers for months.
Everyone knows that the PIGS are bankrupt. However, not many realise that France is in an even worse position. And it’s the second largest economy in Europe!
France will bring down Europe within the next three years. I don’t know who has a lower approval rating, US President and professional golf player Barack Obama, or socialist engineer and French President François Hollande.
The French budget deficit is only growing. This year’s deficit is should come in at 4.4% of GDP. This is even higher than last year’s 4.3%. Next year, the deficit should reach 4.5%. And the deficit should blow out to 4.7% of GDP in 2016.
In my view, these are conservative estimates. For starters, France said the deficit would fall to 3.4% in 2015 and this was only six months ago.
France has the highest personal tax rate in Europe at 75%. And now, with nowhere left to turn, it wants to increase taxes on big businesses. Even punters that own a second home will be slugged an extra 20% tax. Rising taxes are driving down consumer confidence and spending.
Individuals and businesses are starting to have less and less discretionary income to spend on hiring new employees, Christmas toys and holidays.
This is driving deflation faster than any politician can possibly imagine. And if you look around the world, it’s not only France that’s raising taxes on crippled economies. Europe, Japan, the US, the UK, and even Australia are all raising taxes on the middle class and businesses.
With French government debt now over 95% of GDP (83% in 2010), it’s not looking good at all for the socialist country. Public expenditure amounts to a whopping 56% of GDP (one of the highest shares in the world).
It’s no wonder France’s economy should only grow by a paltry 0.4% this year. And it posted practically no growth in 2012 and 2013. Even Spain and Greece have higher economic growth than France does.
Now what’s even more incredible is the French 10-year bond yield. It stands at around 1.17% — a historic low — and is down 1.3% since the start of this year. The yield is only 0.4% above the yield on benchmark German 10-year debt. The people who are buying bonds have lost their mind!
The primary issue here is that European banks are required to buy sovereign (country) debt. This debt is exceptionally risky. Even Switzerland’s isn’t part of the EU and orders its pension funds to buy 75% of government bonds.
When the banks get into trouble, the European Central Bank (ECB) steps up to the plate, unveils a money printing program, and bails out the banks. This happened in 2012 when Draghi came out and gave his, ‘I’ll do whatever it takes to preserve the euro’ speech.
The euro is the most flawed currency in the world. It exists primarily to benefit politicians more than anything else.
In other words, what Draghi said was: ‘I’ll do whatever I can to save my job’.
The point is coming where interest rates offered on sovereign bonds just won’t be worth the risk of buying the debt.
Thanks to money printing, we’re near the end point of gigantic BUBBLE in BONDS. How much lower will the yields fall before people start to say, ‘these countries just aren’t worth buying anymore’?
As I said, we’re right on the cusp of a gigantic switch from debt to equity markets. I’ve been preparing Diggers and Drillers readers for this all year. I’ve been recommending quality resource companies which should outperform in the coming bull market.
2015 will be a year when punters hunt for yield.
Gold doesn’t offer yield. 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$1,157.70 per ounce. I’ve shown Diggers and Drillers readers monthly analysis on gold and silver — this will continue. Have a read of the publication if you’re interested in following my analysis on gold.
The only game in town is equities.
But the bullish momentum on the Dow slowed last week. And it’s come to a halt this week. This gives me reason to believe that a correction is still on the cards next week.
Now let’s look at the technical bigger picture to help explain this story. The chart below tracks the Dow Jones Industrial Index. Each bar represents one week.
The chart shows you that the Dow Jones has been in a strong bullish uptrend since 2011. The Dow has just broken through upper resistance of the channel line. This trend dates back to the downwards stock market break in October 2008.
Considering the bullish trend, technically, the Dow Jones could see a run up to roughly 17,750 points. This would see it hitting the pink upwards trend line, starting from the 2013 end of year low to the September 2014 high.
I said it could happen this week, but momentum has been flat, and we haven’t reached this target. The Dow is now trading at 17,652.79 points.
There’s a possibility that it could continue rallying from 17,750 points. The much anticipated debt to equity market switch may be underway as we speak — hence the relentless bullishness of the US stock market.
But I’d expect the Dow to reverse next week.
Bullish momentum is slowing. And we’ve already seen a 9% run since the October low. In this case, we’re at risk of returning to 17,000 points soon. 17,000 points is the MAJOR support and resistance level for the Dow Jones.
I wouldn’t be surprised to see the market retest 16,750 points later this month or in early December. 16,750 points reflects the 61.8% Fibonacci retracement level.
At the same time, December 31 is the end of financial year in the US, which means many hedge funds will unwind their worst positions, so we should see some tax selling in November.
This year’s tax selling season comes at a great time. The Federal Reserve won’t print money this month. It has halted its money printing program…for now anyway.
For now, keep your eyes open and hang onto your hats. There may be another chance to buy cheaper stocks in the month ahead…
Jason Stevenson,
Resources Analyst, Diggers and Drillers
The post The Dow Jones: November Correction to Start Next Week appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
