Ed Note: The technical analysis in this article has been updated since it was published in last Friday’s Money Morning.
The correction I warned you about seems long gone. However, keep in mind, the Dow won’t only see blue skies from here. I’ve said for a while now that I expect a minor correction. I gave more details on what you should expect in last Monday’s Daily Reckoning.
That said, you may have wondered where I see the Dow Jones trading by the end of next year. And importantly, what does this means for resource stocks? Let’s face it…a large amount of stocks on the ASX do have resource-based business models.
Diggers and Drillers readers received significant analysis on the questions above last week. Today, I’ll give you a brief summary of what was discussed.
The European sovereign debt crisis is on the horizon. Governments are bankrupt and we’re witnessing the final stages of a government bond bubble.
The euro and yen will be sold off heavily next year. Japan and Europe are two of the largest capital markets in the world. The bullish US dollar rally will set the scene for the coming collapse in the European Sovereign debt markets — destined to blow up within the next couple of years.
This is a serious risk to the world’s financial system. We need to act now not later.
You’re about to witness a gigantic, global capital shift from the US$160 trillion debt market to equities markets (one third of the size of the bond market). The bullish US dollar and the thirst for yield will see gold sold off next year, sending more money into the stock market. And, thanks to the IMF, cash is no longer a safe option.
This bull market has absolutely nothing to do with company fundamentals anymore…even central banks see the risks and are buying equities. As they say, don’t bet against the Fed!
Keep in mind, the bullish US dollar is what’s driving the Dow Jones upwards.
Technically, the Dow Jones could be trading at 26,100 points by the end of next year. Check out Diggers and Drillers if you want more details on why.
The Aussie market should follow the US, climbing higher next year. 2015 is set to be the new 2005 in the stock market. 2005 saw commodity prices bottoming…and resource stock valuations started to take off. And if you pick the right stocks, you can outperform this bull market.
Nonetheless, it won’t just be blue skies and cocktails for commodity stocks next year. The US dollar bull market will have huge implications for resources.
Mathematically, commodity prices will have to decline when the US dollar rises, because prices are denominated in US dollars. Next year will be a tough year for many sectors. Precious metals (gold, silver, platinum, and palladium), copper, crude oil, iron ore, coal — to name a few — will get smashed across the board.
You can expect a number of resource companies to go under in 2015. Even the survivors will be in a lot of pain. The fact is, resource company balance sheets are not pretty.
It may shock you that a resources analyst is this honest. This fact remains: Diggers and Drillers and Daily Reckoning aren’t stock broking publications. Stock brokers are paid to be bullish; I’m paid to be honest and thorough.
2015 will be another tough year for many, though not all, resource punters.
Some resource companies will still outperform in the 2015 equities bull market, despite the destruction in commodity prices thanks to the bullish US dollar. Because I’ve seen what’s coming for several months now, I’ve been able to prepare my readers for next year.
I’ve spent hours of research strategically selecting stocks that have the best chance to outperform in the coming 2015 equities bull market. I must say, this hasn’t been an easy task…
Enthusiasm and irrational exuberance is about to be reborn. This should help some resource companies see an earnings valuation lift as confidence comes flying back into the stock market. Some quality smaller resource companies are also set to outperform next year.
At the end of the day, you must keep in mind that this is a government bond bubble.
Governments are bankrupt and won’t look after you in the future; plan to look after yourself. They think they can fix any problem by raising taxes, increasing capital controls, and tightening regulation (like trying to regulate the internet). This is killing growth and driving unemployment higher.
The smart money is selling bonds and buying equities. 2015 will be a year when punters hunt for yield.
Gold doesn’t offer yield. And it will be smashed by the bullish US dollar.
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$1,221.80 per ounce. I’ve shown Diggers and Drillers readers a detailed monthly analysis on gold and silver. If you’re interested in knowing where gold is heading in 2015, click here.
The only game in town is equities.
Have a look at the chart below. It 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 blue channel lines have held the Dow’s trading pattern relatively well over this period. Once the Dow moves above the upper blue channel on a weekly close (18,160 points), it’s game on for the 2015 equities bull market.
For now, 18,000 points seems to be the psychological barrier to break.
We saw the Dow close lower at 17,280 points last week. Thanks to falling crude oil, the Dow dipped 2.8% for the week…trading down from its recent high of 17,991 points. I’m hardly going to lose any sleep on this one…
Talking about last Friday’s trading, the Dow got hit hard and closed down 315 points, or 1.79%. When you’re looking at moves like this, instead of looking at the points lost in the session, focus on the percentage loss. Any move in excess of 1%, down or up, is a large move.
Friday’s close was consistent with much of the week’s trading. Last week’s trading included a number of 1% plus moves — again both up and down. I welcome the trading moves…we’re witnessing a healthy bull market — importantly, and incredibly, we’re still in the early stages.
Now at 17,280 points, we’re trading near a major support level.
Major support exists around the 17,150-200 point level. This is shown by the red horizontal line. A weekly close below this level would see a return to a correction. And it’s likely we would see the Dow return to the 16,500 point level before the 22nd of January 2015.
It really doesn’t bother me if the Dow closes lower this week. And it really doesn’t bother me if we see a slight correction in the weeks ahead. These times will mark great buying opportunities in the future. The market is going much higher into next year, heading towards 26,100 points by the year end.
Although for now, we have to realise that we could correct slightly. However, if you want my opinion, we’re going higher this week.
If you think about last week…it was all about crude oil.
Crude oil is now trading around US$58 dollars per barrel. Last week we saw both OPEC and the International Energy Agency cut their 2015 global oil demand growth forecasts.
Diggers and Drillers readers aren’t surprised about what’s happening in the oil market. Around a month ago, when oil was trading above US$77 dollar per barrel, I gave Diggers and Drillers readers extensive analysis on why crude would hit US$58 per barrel in 2015. I got the price target level correct, albeit, I thought the price drop would come at a later date.
Nonetheless, with the downgrades all over the news, it’s not surprising that crude didn’t bounce last week. And falling oil sent the Dow Jones lower.
The good news is that, the oil arena has been slammed with bad news. And I’d say that this past fortnight’s news has been over exaggerated by the mainstream. Lower crude is now overpriced into the market.
Given the steepness and momentum of the crude oil price decline over the past fortnight, we should see a bounce this week. I explained the extent of this coming bounce to Diggers and Drillers readers last week.
A bounce in crude oil should see equity markets higher this week.
But this isn’t all…
The European Union seems to have ‘sorted’ — of course temporarily — Greece’s debt troubles. The Eurozone creditors have granted Athens another two months after the end of this year, when its €240 billion ($297 billion) emergency support program was due to end.
But Athens Prime Minister, Antonis Samaras, has delivered a bombshell. He said Greece would rather default than repay hundreds of billions of euros in bailout loans. This saw social unrest skyrocket in the capital last week. At the same time, Greece’s stock market saw its worst one day loss since 1987.
Welcome to the Eurozone. Politicians and lawyers are destroying the European economy and defying the will of the people. We’re seeing the destruction of the European Union and the euro playing out in real time.
In summary, if we see a weekly close below 17,150-200 points this week, we’re likely heading lower in the weeks ahead. In my view, we’ll dip towards this level before bouncing higher…
The bottom line is that the Dow is making a very bullish setup for 2015. The market is extremely bullish. Sometime around the 22nd of January 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.
Resources Analyst, Diggers and Drillers