Just last week the Dow flirted at the 12,400 level before pulling back…
The market’s given up a few hundred points since then…and as a result some traders are calling for a big pullback. Others are calling for a moon shot…saying the market will trade even higher. Yet others think the market will start trading sideways…as a way to take a breather from the two-year Bull Run we just witnessed.
Why is there such a big focus on the level of the Dow right now?
Why do some traders believe we’re only going higher from here?
Why do others believe we’re about to plummet to new lows?
These are all great questions. And buried in the answers are the dominating thoughts on where the market is heading. Depending on which set of facts plays out, savvy investors can start setting themselves up for huge gains in the next few weeks and months.
So let’s look at these questions one at a time…First, why is the current level on the Dow so important?
Chart courtesy of StockCharts.com
This is a question answered best by the technical analysts of the world. See, technical analysts focus on chart action, volume, and price movement. They look at charts like a doctor examines a patient’s x-ray.
Some of the key indicators many technical analysts look at are historical highs and lows, past support and resistance levels, and of course patterns.
We’ve recently passed through a number of support levels and a key one is Dow 12,000.
This level triggers any number of flags. It meets the key criteria as an anchor point for “round number theorists”… those that believe the markets are attracted to round numbers.
Dow 12,000 is also a key level for support and resistance. For example, the 12,000 level on the Dow was first crossed in late 2006. But that’s not all. It acted as a key level of support in early 2007 and again several times in 2008.
The point is, for some reason, the 12,000 level has been an area where bulls and bears battle it out in the market.
These historical levels often continue being a point of importance for years – even decades after they were first identified.
Here’s another reason this price level is so important.
Many investors bought these support levels in 2007 and 2008 – And many have been holding those investments. Can you imagine waiting for more than 3 years to get back to breakeven!?! Now you can understand what these old investors are thinking as we hit these price levels (again).
When we crossed above the 12,000 level, buying pressure overcame selling pressure. As a result, this resistance level has now become support once again.
For many technical analysts, it means we are heading higher!
But this is only the tip of the iceberg.
Don’t forget the Federal Reserve. They are the number one reason many fundamental analysts think the market will move higher too.
I’ve mentioned this before.
The Fed is actively pushing economic stimulus into the markets. Easy money is being dumped onto the banks…and it’s eventually finding its way into investors’ hands. The easy money is being thrown into markets all around the globe. And many believe it will only push the Dow higher.
Given recent chart action, support levels, and the free money ideas of the Fed, we now know why some technical and fundamental analysts are calling for the Dow to move higher.
Let’s take a moment and look at what the naysayers are trumpeting.
Many of the “Bears” in the market believe we are way overvalued.
They say the Dow at these levels is a joke. All of the stimulus will eventually disappear, and the hot air is coming out of the markets. We’re heading for a double dip in the economy…and in the Dow.
They’re calling for another leg lower.
The “perma-bears” biggest argument lies in the crash of 1929. Most investors don’t realize the crash of 1929 was followed quickly by a rebound in stock prices. The market moved higher for a number of months from late 1929 to around April of 1930, setting a trap.
After the bear trap rally fizzled, the market continued making new lows until 1933!
Today, many analysts are calling for the same market action. They say that this time around is no different from the 1929 crash. They believe the current rally to well over 12,000 is a long overdue bear trap…and when it’s sprung, the markets will be devastated.
They might be right…but I doubt it.
See, the difference between 2011 and 1929 can be counted in hundreds of ways…But there are two reasons I focus on the most. First is the Federal Reserve and second is corporate profits.
First the Federal Reserve is making money cheap and easy. We’ve talked about it time and time again. But here’s the difference…that wasn’t the case back in 1929. Back then when money stopped flowing, businesses went under.
Think of the bank where you deposit your money. You can walk up any time and take your money out from a teller or an ATM. It’s safe as can be.
That wasn’t the case in 1929. If your bank went belly up…so did your savings. It was gone.
That’s not happening this time around. Look, no doubt the last few years have been tough and a lot of money has been lost in the markets.
But it’s a lot different than what we experienced during the great depression.
Huge amounts of wealth were lost back then to bank and business failures. We’re not seeing that same devastation today. Businesses are more stable than ever before. And while unemployment (at 9%) is high, it’s not destructive.
The other reason I don’t think we’re going to see a double dip in the markets is because of corporate profits.
It’s hard to destroy a company that’s making money. You might cut its stock price down, but once the profits start rolling in, it’s only a matter of time before the stock price rebounds.
And that’s what we’re seeing right now.
Corporate profit levels are reaching some of the highest points ever. Some of that is due to US economic activity…but a big portion is due to the growth in emerging markets. And according to Bloomberg, the amount of cash held by US corporations is near all time highs…more than $2.4 trillion is sitting in bank accounts.
Remember we’re seeing inflation concerns all around the globe.
Economic demand for goods and services in emerging market countries is growing.
Demand for US made goods is huge. And nearly 50% of the revenue for the S&P 500 comes from overseas sales.
If sales are growing, it’s going to be hard for US Corporations not to make a profit…and remember, it’s hard to destroy a profitable company.
With the fed throwing out easy money, and corporate profits moving higher, the risk of a double dip recession is virtually eliminated. So much for a repeat of 1929.
So where do we head from here?
What we are seeing right now is the next wave in American business. It’s business growth overseas. Emerging markets can and will push the US Markets higher for the next decade or more! Despite the support of the Fed, or their eventual tightening of the money supply…despite support and resistance lines watched by technical analysts…despite fears of a second leg down or a double dip in the recession, Dow 12,000 is just a start.
I could see the Dow doubling in the next few years. Corporate profits are strong and balance sheets are stronger. When the global recovery catches its wind, the markets will really move…and the only place I want to be is fully invested in stocks!