Dow Jones Industrial & The Fake Economic Recovery

Updated April 2020

Dow Jones Industrial and the Economy

The U.S loves to dictate rules and enjoys pointing a finger at nations it deems that is not playing fair. In reality, the truth is that the U.S is the one that does not play fair, it says one thing and does another. For example, it talks about free markets and how it has the welfare of its citizens in mind. How it has done a lot to stimulate the economy since the great recession of 2008. Let’s examine each of these points one by one

US Markets are Free

Our response to this delusional statement is “tell us another joke”. Any shred of freedom was eviscerated once the Fed first flooded the markets with several rounds of QE and then purposely held interest rates at ultra-low levels for a record period. This has triggered one of the biggest corporate debt binges of all time. Corporations now have decided to borrow money and use these funds to boost earnings. This money is not invested in the company or to purchase capital goods or to do anything that improves the bottom. What they are doing is buying back huge numbers of shares and thereby artificially boosting the EPS. Modern alchemy at its best, we addressed this scheme in detail in an article titled Share buybacks just another WallStreet Scam

The US has the welfare of its citizens at heart

This is another Joke. If the government cared about its people, 75% would not be leaving from paycheck to paycheck. The number of individuals on food stamps would not continue to soar and the average salary (when inflation is factored in) would not be lower than it was 10-years ago. Finally, the Fed would not be punishing savers and rewarding speculators by keeping rates low for such an inordinate amount of time. In this article titled Oops, we did it again, we covered the issue of why we expect this period of low interest to last for a very long time.

Stimulating the economy

If by stimulating the economy they mean running the printing press then they have done a splendid job. However, if looks at things through a clear lens, then the Fed and the government has done a pathetic job of stimulating the economy. All they have done is to create the illusion all is well by providing corporations with easy access to hot money. This hot money is then used to repurchase shares or indulge in other speculative activities that create the illusion all is well. This illusion will end as soon as the supply of hot money is cut. As long as it is easy to raise debt as is the case now as interest rates are so low, then this strategy will work.

The problem is that this strategy allows many companies that should have been bankrupt long ago, a second lease on life as they now have access to funds they would not have. As evidence of this look at how much time was spent over the possibility that the Fed would raise rates by a pathetic 0.25 basis points. If the economy were improving, then a Fed hike should have been seen as a positive event as it indicates that the business outlook is improving.

How to do you play the market under such conditions

As we have stated over and over again, volatility was expected to rise and is still expected to rise even more going forward. The year started off with a bang, and the volatility is showing no signs of ebbing.

As volatility is set to soar to levels never seen before, one had to understand that the market will surge upwards then pull back strongly; this is what volatility is all about. Read the following excerpt

The biggest losers on the day: airlines, major insurers face tens of billions of dollars in claims after last week’s attacks, as well as financial services, travel and hotels, and retail stocks. The biggest winners: defence and security stocks. “I understand it’s tough right now. Transportation, business is hurting, obviously, the market was correcting before this crisis. But the underpinnings for economic growth are there,” Bush told reporters at the Pentagon.

“Companies can buy back their own stocks, and that is something that I hope companies will do, and I hope that they consider strongly,” says former Labor Secretary Robert Reich, who is now a professor at Brandeis University in Waltham, Mass. Still, it will be a tough task to get the exchange up and running full-steam, say experts. Full Story

Reading this article one would be inclined to say that the author appears to know what he is talking about. However, if you clicked on the link, you will note that the article was written years ago when the Dow was trading slightly below 9000. Fast forward and the Dow industrials have actually doubled in value since this article was written, minus the current pullback. If they were wrong then and a host of other times, what makes today any different from tomorrow. Will the markets now crash and burn? We think the markets are more likely to end the year on a higher note than crash to new lows. The naysayers have been waiting for this crash for a long time and had they listened to their own advice; they would be bankrupt several times over. Instead, you find out that these naysayers are doing rather well, which means they sell information to their subscribers or clients that they do not act on.

The game plan should be short and simple

Very strong pullbacks should be viewed as buying opportunities; investors should make a list of stocks they would like to own. When the market’s pullback, strongly deploy money into a list of strong bluechip stocks; while the markets are pulling back now, compile a list of top stocks you would like to own. A simple understanding of trend analysis would be helpful. In a follow-up article, we will provide everyone with a list of the top sectors based on relative strength. We will also provide a list of the top 10 stocks in the market.

Sentiment analysis

No bull market has ever ended when the crowd was worried. Our own sentiment indicator illustrates that the Crowd was far from Euphoric before the correction started and the crowd is now moving into the anxiety and gloom and doom camp. Under such a scenario it is hard to envision a market crash. The number of bulls has dropped dramatically and the number of bears has spiked up in the past two weeks. The Dow Jones Industrial average is ready to soar higher. Every Market needs to let out a dose of steam before it trends higher.

The psyche of the average trader has taken a beating, so it is likely that this correction will end up being the most severe correction since 20111. However, rather than setting the path for a massive crash, we believe this correction will be setting the foundation for a strong bull run.

The Dow Jones Industrial And Overall Market Outlook April 2020 Update

The mass mindset is hard wired to panic. One can overcome this shortfall by observing this behaviour impartially and then ask this simple question “why am I doing something that has never led to a positive outcome”. Secondly, as we have advocated for years, one should maintain a trading journal and the best time to put pen to paper or fingers to a keyboard is when the markets are tanking. Make a note of the emotions that are swirling through your mind. Jot down some of the headlines the media is pushing out and observe the reactions from your fellowman. This information will prove to be priceless in the weeks, months, years and decades to come.

The markets are trading in the extremely overbought ranges on the weekly charts, and in theory, they should let out some steam, but the monthly charts, for now, are exerting more upward pressure than they normally do. It should be noted that the weekly charts also move relatively slowly, so there is still time for the markets to let out some steam