Last year, I told you that the 2015 equities bull market would start on the 22nd of January 2015. The stock market certainly didn’t disappoint on this date, jumping 1.48% or 259.70 points. That said that caution remains for the next two weeks — we may still see a sharp stock market correction before the bull market truly unleashes in mid-February.
Last week European Central Bank President Mario Draghi revealed his one trillion euro money printing program. The ECB will buy European sovereign bonds with the package. It will spend 60 billion euros per month on bonds until September 2016. This will push bond prices up and drive yields lower.
The smart money is starting to flee Europe. This is evident by the decline in the euro. Momentum behind this trend will build and thanks to this decision, there’s now a buyer to keep yields low.
The mainstream will tell you that low yields are positive for Europe — confidence in the EU has been maintained! Unfortunately, this decision marks the beginning of the end. The European sovereign debt crisis awaits us in 2016/17.
With this event drawing near, the attention is on Greece. Greek election results are out. Athens has a new government. The Syriza government won an outright majority. Syriza leader Alexis Tsipras said,
‘Our common future in Europe is not austerity, it is the future of democracy, solidarity and cooperation.
‘Today we are deciding whether the troika will return to Greece … or whether, through tough negotiation, the country will claim its return to dignity.’
Punters are questioning what this means for the future of Europe. Syriza is an anti-conformist party. It has effectively said that the days of austerity are over.
This is making the market nervous. Hence, why you’ve seen the stock market trading sideways for some time. With that in mind, Germany and Brussels have publicly downplayed what’s become known as the ‘Grexit’. They’d like Greece to stay in the EU, but claim they aren’t fazed either way.
But if you look more carefully, there’s another story coming out from under the rug.
European governments are bankrupt. Governments know that the sovereign debt defaults are coming in 2016/17. The International Monetary Fund (IMF) has actually prepared a schedule to deal with the debt defaults. This is why, astonishingly, Germany has offered Greece the option of spreading its debt repayments over 100 years.
Indeed, that is 100 years!
Behind the curtain, Germany and Brussels don’t want Greece to leave. If it leaves, European banks will have to disclose the default losses on their balance sheets. Importantly, they know that if Greece leaves, the euro is destined to collapse. And this is where things get interesting…
Europe didn’t consolidate the debts of each member nation at the birth of the euro. As a result, each European bank is required to own sovereign debt from each country. This was the right decision politically. However, this political choice is why the euro is destined to collapse.
If Greece defaults on its debt, bank balance sheets of the other EU members will take a hit — and so will the euro.
Once Athens breaks the EU’s dream of a united Europe, institutions will start to wake up. The smart money will start wondering who will leave next. Italy (my bet), Spain, France…?
ECB money printing will cover over the cracks for the time being…prolonging the crash. Mario Draghi’s job as ringmaster of this circus is alive for yet another day.
But the smart money will soon start to exit Europe. You’ll see it head to the US — because there’s really nowhere else to go. The US dollar is a ‘safe haven’.
In turn, institutions will start selling the euro to all-time lows against the dollar. As such, the recent run up in the gold price to a stellar US$1,300 per ounce will not last. Gold will be sold off to US$931 per ounce this year. You must realise that the ECB’s money printing program is only covering up the coming sovereign debt crisis. It will not stop it from happening.
The US dollar is only set to increase. This will crunch resources, emerging markets, and debt markets along the way…driving the US dollar and its stock market even higher as capital flees in fear. The capital switch will gain momentum into 2016/17. 2016 is when you can expect the resources markets to turn extremely bullish.
But don’t wait for prices to bounce before getting on board. Buy quality resource stocks at bargain prices while you have the chance. If you want to know more, here is a great place to start.
Now, let’s check out where the stock market is going…
Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week.
Back testing the above chart shows that the Dow Jones has been in a strong bullish uptrend since 2011. The blue channel lines have held the Dow’s trading pattern relatively well over this period.
The upper blue trend line must be broken for the Dow Jones to hit my target of 26,100 points by the year’s end. For this to happen, the Dow Jones must see a weekly closing above 18,500 points — this resistance level rises by the week. I expect the market to break 18,500 points sometime in mid to late February. Keep in mind, the Aussie market generally follows the lead of the US.
For now, we’re caught between a rock and hard place. The Dow is in a consolidation phase, tracking sideways. This reflects the uncertainty leading up to the ECB money printing decision. And also what the Greek elections will mean for Europe’s future.
Once the Grexit is out of the way and ECB money printing comes online in full force, confidence will return to the stock market…pushing it higher. The smart money will recognise the risks in the debt markets and move to equity markets. The coming debt to equities switch is the premise behind my year-end target of 26,100 points.
Thanks to the Greek elections, the market will likely remain cautious this week. A sharp correction is a real possibility given the talks which signal ‘the end of austerity and Brussels’. Volatility should hit the market following the Greek election decision.
17,274 points remains the most important technical level. The pink horizontal line shows this. We’ve bounced off the 17,274 point level multiple times. Needless to say, 17,274 points is a major support level.
However, I’d like to see the Dow close below the red trend line for a correction to take place. A daily closing below 17,200 points this week would likely send the Dow lower.
A breakdown of the red trend line should see the Dow Jones re-test the lower blue trend line. This target represents 16,370 points. As per the last correction to the bottom blue channel line, it would be quick and sharp.
We remain at an important juncture. Given the falling euro and rising US dollar, I can’t guarantee a correction will take place. That said, caution should be applied to the market in the next two weeks.
A weekly close above 17,900 points (black horizontal line) next week will signal that the bullish days have returned. We’ve seen four weekly closes above this level. However, the breakout had little velocity and the initial run was unsustainable. We need a weekly close above this level to pave the way to 18,500 points.
I don’t expect this to happen until after the Greek’s reveal their new strategy. They will most likely choose to leave the EU, and this will set the stage for the debt to equities switch.
Uncertainty around the new policy makers may last a week or two from the election date. The fate of Europe certainly won’t be decided overnight. This is why the Dow Jones should once again become exceptionally bullish in mid to late February. At this time, gold will start its true decent towards US$931 per ounce.
The bottom line is that the Dow is making a very bullish setup for 2015. You’ll see an explosive blast to the north as we head towards 26,100 points by year end. The Aussie market should follow — to the 6000 point level.
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