Yes I am still on holiday, but I caught a headline on CNN today that the Dow had fallen 360 points and the S&P 500 was down 38 points.
I wrote earlier in the year (and stuck to the idea) that the Dow was more than likely headed to 11,000, which represented its Primary Value Zone, whose base was back in March 2003 (the start of the last Bull Market). This prediction is looking good now.
I haven’t had much of a chance to read around, but the latest falls were attributed to a variety of reasons, but surprisingly not yesterday’s move by the Fed. Unless I have really misread something, yesterday’s announcement to keep rates on hold was also coupled with a fairly hawkish statement, almost certainly leaving the path clear for rate increases later in the year. Looking at the yesterday’s charts, this was followed by an immediate sell-off.
Today’s follow through selling, while almost certainly exacerbated by other factors (Citi downgrade, Oil at $140, forecast reductions etc.) we must remember that last year’s massive run up was in large part driven by interest rate reduction expectations. Now that rates are likely to start to head up (which they surely must given the rampant inflationary pressures witnessed on all fronts — notably apart from wages, yet), this is sure to have a substantial downward affect on markets.
However (and this is a big ‘HOWEVER’), we are now at, or are approaching, extremely tempting and significant levels at a massively significant political time.
I wrote the other day about the US Presidential election and, while my thoughts on a double bottom look to be well out of the window, it would be unwise to bet against the positive impact this can have on markets. For the record the system puts the Dow’s March 2003 Primary Value Zone at 11133:11154 and the S&P 500’s March 2003 Primary Value Zone at 1256:1262. We are within touching distance of these levels.
Regular readers of this column will know that I am still medium term bearish on the economic outlook, but the significance of these levels really cannot be understated. Given the timing, this is especially the case. The case for going long is a compelling one, but summer volatility is also something to be wary of. Catching falling knives is generally to be avoided, but in this instance I think I am going to have a go…..