Has the Dow peaked?

[Liberty]

Has the Dow peaked?

During the second half of last year and into early this year the DJIA was in a strong confirmed uptrend, culminating in a close at 10737.7 on Feb 11.

The uptrend was broken with the fall below 10300 on March 10.

And with the fall below the psychological 10000pt barrier on May 10, the Dow entered into a downtrend.

We can point to the uncertainty in Iraq and the looming domestic political uncertainty as factors in the turnaround of the market. But with a backdrop of a rebounding economy, is this going to be a temporary pullback, or is the uncertainty surrounding the chances of Bush's re-election, and the mess he's made of Iraq, coupled with ballooning deficit going to anchor the market down further?

How closely should we be monitoring the situation in the US, given many of us don't have significant investments there, but know that what happens there will no doubt impact on our Australasian investments?

[Nimble]

Agree Liberty. Based on Dow theory the Dow is now in a downtrend. However the NZ market based on the NZSX50 still in an uptrend. Find myself caught between;

1. Wanting to be fully invested in the NZ market as from Mon 12/5 in order to fully participate in the new short term uptrend and
2. Wanting to sell down the weakest of my holdings to protect against the flow on affect from the falling Dow

I have been amazed at the strength of the NZ market especially this week considering the recent confirmation of the change in the Dow. I know the likes of KJ, Cantab & Warren Buffet advocate staying fully invested in good quality stocks all the time and this has certainly worked in the NZ market over the last 4 years of so despite the bear market overseas. But the;

1. NZ economy is about to slow which it hasn’t done for a while making IMO more vulnerable to overseas influence i.e. the falling DOW.
2. Plus many of these quality stocks now have significantly higher PE’s than during the bear market making them more vulnerable to a downturn.
3. And many commentators are recommending a move to defensive stocks.

One solution however could be to stay fully invested in the NZ market till the trend changes.

[skinny]

I am an active investor in the US (more so than NZ) and I really have no idea to your question Liberty ! Its an interesting tussle all right: record earnings, solid economic growth, rising employment vs. rising energy prices, geopolitical concerns & interest rate fears. Yesterday was a classic: real solid start to the market with a couple of stocks on my watch list up 6%, but a sell-off later in the day when US oil investories came out & more bad news from Iraqi put an end to most of that. My strategy in the US is to stay long the energy sector which is still WAY undervalued, and take profits regaularly on everything else. So far seems to be working out.

In NZ I have been relieved to see the markets have largely de-coupled from the US action. (Anyone run the correlations recently ?) Talk of a slowdown in NZ has been exaggerated and with the NZD now at more comfortable levels I think the exporters will continue to do well. The earnings season is upon us and we'll again see real solid numbers across the board. In this environment IMO its more likely my NZ holdings will ramp up again than follow US markets down :D

[SEC]

The Fed Model states that the S&P (and therefore the Dow by default) is as cheap as it was in late 02/early 03. Before that it hasn't been this cheap since 94/95. That makes the S&P undervalued long-term and a good hedge against a falling NZD.

However medium term the increase in forward earnings (up approx 10% since Feb) has been more than compensated for by the drop in 10 year Treasuries, down 15%. Then according to the Fed model, the S&P should be down about 5% over the same period (which has indeed occurred).

I would not like to hazard a guess on the short-medium term of where the Dow is going but I am more certain that Treasuries yields will continue to rise. Which would suggest the Dow has indeed peaked for the moment.

SEC

[Nimble]

Excellent article re the Dow, reasons for its current decline and thoughts for the future. If you want the summary just go to the last couple of paragraphs.

Interest rate rises and rapid growth loom
14th May 2004
Global equities are in a state of rout. The Dow Jones Industrial Average gave up the 10,000 level with hardly a struggle. Other things are happening in the market that are worth emphasis.
One unusual phenomenon is that gold is going down and oil has appreciated; they normally act in loose association. So what is driving the market?
March was decisive. Until about March 20, there was a bull market in equities, driven by good earnings, increasing employment and consumer spending. The S&P500 chart shows a nice upward curve from May 2003 to March 2004, when the S&P rose steadily from 900 to 1160.
There was a shock, around March 20 (the train bombings in Spain), but equities recovered to stabilise around 1140. Another selloff occurred on April 12.
Obviously there was a deep earthquake in the financial world, although most observers thought nothing untoward was happening. But the best financial seismograph is always the bond futures market, for the bond market is where the real money is.
The market turned from a rising capital trend to a steeply falling one on March 21. Huge sums had gone into the market, driving up the 30-year bond to $115; within weeks it had gone down to $106. Vast numbers of bond holders were taking a 10% loss of capital * and bonds are supposed to be secure. The selloff in the bond market was mirrored in the gold market.
Oil wavered for a day or so but then recovered its forward march. The selloff was because the market had suddenly become aware of an interest rate rise. The Federal Reserve made no changes but it was expected to.
The gold selloff was only partly affected by rising interest-rate concerns. Some investors go short on gold when rates rise because of the opportunity cost of holding it. Equally, other investors take a contrary view and buy gold as a store of value in inflationary times. Gold is therefore hard to pigeon-hole.
Currency is another influence. As a general rule, when US interest rates rise (or seem about to) foreign investors are attracted to US bonds. They buy US currency, increasing the dollar's relative price. A higher dollar weakens gold's role as a hedge against currency depreciation, so it loses value quickly. Gold is extremely volatile.
As a way of understanding the market better, I spent some time on Saturday looking at trades in gold futures on Friday, May 7. The market opened in Tokyo with only 20,000 contracts. Sydney, Singapore and Dubai were active. London sold 60,000 contracts, New York 250,000.
Gold had lost a few dollars but a huge trade had occurred. If gold is $400 an ounce and a single contract equals 100oz, about $US150 million entered the market.
The physical market is also big and gold equities have been one of the biggest losers since March. A good example is Newmont, the biggest miner of all. In Australia it had gone up to $A6.50. It is now about $A5.20. Some gold equities have halved. Silver has suffered a holocaust.
US bank shares have also suffered: the US Bank Index (BKX) fell from 103 to 98 in a day, hesitated and has since slid to 95. This means a loss of 7-8% on a bank portfolio. Banks suffer when rates rise because lending falls, reducing the size of their loan portfolio.
Oil also suffered briefly but marched on toward $US40 a barrel. Market commentators always ascribe its rise to political factors, especially Iraq, but there is an economic rationale: as the world economy improves, which is what rising interest rates are signalling, the demand for energy is rising. Oil is on an all time high and natural gas not far off. But petrol costs are hurting consumers and worrying Wall Street.
The shock appears to have come from the CPI index, which showed a 0.5% increase in one month and the prospect of a 5% annual rate. The market saw a turning point. It became of matter of when the Fed would raise rates and by how mu

[skinny]

Nimble - yep - that does get at just about all the forces in play at the moment. I fully agree with the sentiment that we could get a rally once the Fed raises rates and hope they do get on with it (actually I'm sure they will ;)).

The main factor that leaves me very +ve for the longer term which I've nattered on incessantly about in the US engine roaring link is the fact that US productivity growth continues to be very strong by historical standards. This implies earnings should continue to be strong and the corollary is that the longer prices stay flat the more that value returns to the market. I'm just gald I got a pile of dosh over when the kiwi was buying 70 USc !

[Nimble]

Dow down another 130 odd overnight to 10278 and has broken for first time in 5 months recent support level of 10,350ish which has held since Nov. Now technically in a short term down trend. Medium term 16 month trading range. Expecting some flow on weakness in NZ market.

[Paper Tiger]

quote:Originally posted by Nimble
Expecting some flow on weakness in NZ market.

That would be a pity after the last month of strength here! [B)]

[trendy]

US is starting to look very bearish. Higher energy costs are starting to feed through the system with Ford and GM feeling the pinch from conusmers not buying their big SUVs and imput costs steel/energy increasing. The next few weeks a lot companies start to report and it doesn't look like there will be much in the way of good news to lift the market up [xx(].