Archive for May, 2013

More Upside Likely For The Dow Jones Industrials

Posted in Dow Jones Industrial Average (DJI) on May 15th, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

Although overbought conditions are present on long-term charts of the Dow Jones Industrial Average (DJIA), additional upside gains appear likely before testing long-term trend line resistance. That resistance currently sits at 15,840 but rises over time by roughly 50 points per month.

While resistance on the DJIA is not matching up with a similar trend line drawn on the S&P 500 index (which has already broke solidly above its resistance at 1,600), it does oddly correspond with “channel top” resistance drawn off the March 2009 low on State Street Global Advisor’s Spider S&P 500 tracking ETF (symbol = SPY). This “channel top” currently sits at 171.20 and represents a 4.77% gain from Friday’s close. Long-term trend line resistance on the DJIA at 15,840 also represents a 4.77% gain from Friday’s closing level.

Clearly, a set of better-than-expected Q1 earnings, a series of promising employment reports, higher real estate prices and, of course, massive QE programs in both the U.S and Japan have teamed up to lift equity prices. Moreover, a number of central banks have already announced their unusual intention to buy equities or equity ETFs to hold as reserves. According to a recent annual survey of 60 central bankers conducted by Central Banking Publications and Royal Bank of Scotland, 23% of reserve managers indicate that they already own equities or plan to buy them within five years. They include the Bank of Japan, the bank of Israel, the Swiss National Bank and the Czech National Bank In total, the 60 central banks polled are responsible for almost $7 trillion held in reserve.

In turn, these unusual circumstances have put pressure on pension organizations, mutual fund managers and individual investors to “chase performance” in order to secure future investment returns.

One problem that could arise, however, is related to currency exchange rates. While the U.S dollar has benefitted recently from foreign investment funds flowing into U.S. equities and real estate, the impact of a higher dollar “down the road” could make U.S. goods and services look expensive relative to products produced or services offered by global competitors. In turn, that could have a negative impact on corporate profits in future quarters.

For the time being, higher equity prices appear probable over the short-to-intermediate term. In future weeks and months, though, the real question will likely center on whether the DJIA and SPY will be able to break above their respective resistance levels before taking a some sort of pause.


NASDAQ Composite Breaks Above 12-year Resistance

Posted in NASDAQ Composite Index (IXIC) on May 8th, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

April’s better-than-expected employment numbers released Friday sparked a broad-based rally that lifted the S&P 500 Index above key resistance at 1,600 to a new all-time high and witnessed the Dow Jones Industrial Average breaking above 15,000 before settling just below it at the close. Perhaps more important was Friday’s surge in the NASDAQ Composite Index (IXIC) which broke above key trend line resistance that dates back to 2001 at 3,330. Granted, Friday’s close was well below its all-time high mark set at 5,132.52 in March 2000. Nevertheless, Friday’s NASDAQ “breakout” was a big plus for the overall economy since tech stocks in general and the semiconductor sector in particular made solid gains. This combination is usually associated with economic growth since it reflects a rotation out of defensive investments like utilities, bonds and cash and into the technology sector (as well as into the energy and materials sectors) and is crucial to the view that the economy may genuinely be improving.

Although there is a lot of “wood to chop” before more vigorous growth can be achieved, a shift to technology stocks is a reflection of future capital expenditure spending. If those expenditures are realized in future months, the economy should expand and put more people back to work.

On the other side of the ledger, Friday’s employment numbers, while better-than-expected, had a few blemishes. While the unemployment rate for those who did not have a high school diploma went down, the unemployment rates for those with a high school diploma, for those who had some college or associate degree, or for those who did have a college diploma all went up.  In addition, the U-6 measure of unemployment edged higher to 13.9% after falling steadily since last July.

That being said, despite overbought conditions on long-term charts and the fact that margin debt is near an all-time high, equity prices advanced sharply. From a technical point-of-view, if the IXIC can remain above the 3,330 level on a weekly basis, a move toward the next key level of resistance currently sitting at 3,625 may unfold.

A solid reversal below 3,330, on the other hand, would damage this optimistic outlook.