Monday, July 17, 2017

Dow Jones Record High, Just To Be Clear: Bullish

We were going to put another picture of Fed Chair Janet Yellen
but we met our quota for the month last week.  We all have to
settle for a boring word picture. But hey, that word picture
hopefully made you wealthier on Friday. Not so boring.
We wanted to put the recent Dow Jones (INDEXDJX:.DJI) record high in perspective. First let's cut to the chase, it's bullish. It should make you want to buy stocks not worry more.  There are plenty of people worrying, which we'll show and you shouldn't be one of them. Plus, there were plenty of fundamental ingredients going into these new highs as we'll review. We think they can continue.

First Dow Jones Record Highs Are... Bullish 

The trader in us wants to constantly try to keep things simple. Up is good, down is bad, unless of course it doesn't go down too much.

The stock market hitting new highs is a reason to be bullish not worried. We'll review all the fundamental factors further down the page.

We're In The Middle Of A Huge Long Term Stock Market Cycle
Dow Jones 100 year chart
Macrotrends chart with Elazar Advisors, LLC lines.

We show this chart daily to subscribers just to drill it in that what's going on in the stock market is bullish.

To the left you have a century of Dow Jones trading.

You had two 16-17 year cycles. We're eight years into this one.

We think we have another eight or nine years to go.

Also you have confirming breakouts along the way just like we had following the elections in 2016. That gives us some added conviction that we are similar to the past two big moves of the last century for the Dow Jones.

Let's Review The Ingredients Of This Move To A Record High....

Non-Farm Payroll Employment Helped Move The Stock Market Back Up

Two Fridays ago we had a very strong non-farm payroll employment report. We said then,

"Now that this new [jobs] report came out bullish the S&P 500 ETF SPY can start moving back up."

Here was the chart at the time.

SPY ETF pre-market before the last non-farm payroll report
We pointed out that markets peaked out after a weak May jobs report in early June and that the strong June report in early July could get the market off that uptrend moving higher again.

And that it did.

Earnings Drive The Stock Market And Earnings Are Moving Higher

We've pointed out that the best earnings growth in almost six years helped markets rise in the first quarter.

Now in Q2 with better GDP, a lower dollar, and a continued pickup globally, we'd expect earnings to drive stocks in the second quarter again.  Earnings season is upon us.

While non-farm payrolls are the most important economic report, nothing matters more to stocks than earnings.  If earnings are moving up, stocks tend to move up.

earnings drives stock prices
Source: St Louis Fed

We love this chart. We hear technical analysis experts say technicals matter more than fundamentals.

In this chart you see that the red line, earnings, turn before the stock market.

We are now in a period of earnings turning higher based on global growth. This will be another driver than can continue to help the stock market hit new highs.

Tech Boom Coming Can Drive Stocks Higher

We've been pointing out that we're early on in a tech boom. The Fed has been complaining about low productivity. Strong productivity was an ingredient in the 1990s stock market boom.

We think we are about to enter a productivity led tech boom driven by AI (Artificial Intelligence), automation, cloud and software.

We pointed out confirming evidence Friday morning that technology components were in short supply. Demand has been outstripping supply which is a also a relic of the 1990s.  Under-supply leads companies to order more which drives the entire tech food-chain.

Did we mention we're going into earnings season and technology companies are probably going to have to talk about this fact?

Sentiment Very Low Means We Have More Upside Ahead

Also last Friday we pointed out what The AAII, The American Association of Individual Investors just said,

"Optimism declined to the very bottom of its typical historical range."

That was an insane statement. The stock market was inches from new highs and you have nothing but bears. That is a technical analysis signal called divergence which means at some point those bears have to pile back in buying sending the market up further to more record highs.

Deregulation Can Also Drive Stocks Higher

On Thursday we complained how Congress was verbally abusing poor-ol Fed Chair Janet Yellen. Even though we felt bad for FC Janet Yellen we took it as a very bullish sign for the stock market.  Congress is gearing up to pass deregulation which would include reducing the powers of the Fed, which is what they beat up the Fed Chair about.

The moves would reduce shorter term bank capital requirements freeing up lending and investing which can drive the stock market.

The fact that Congress was downright mean to Fed Chair Janet Yellen meant to us deregulation is on its way.

Low Inflation, Low Rates

Last Wednesday at 7:47 AM, before Fed Chair Janet Yellen's testimony hit the wire we said,

"'Very bearish' testimony about hawkish monetary policy will be a short squeeze rally."

The market ripped higher that day to set up Friday's record highs.

We also said in that report on Wednesday,

"There's a CPI number out on Friday so maybe it gets better but with oil down last month, the bias is lower for CPI."

And that's what happened. CPI was slow once again which also helped the stock market hit record highs.

Low inflation drives low rates.

Low interest rates helps stock prices because you use interest rates in your denominator when valuing future cash flows. That gives you your stock prices.

The lower the interest rate, the lower the denominator, the higher your values, the higher your stock prices.

That helped drive record highs.

Let's Put It All Together

Bears on the sidelines combined with earnings picking  up led by a global pickup combined with low inflation driving low rates gives you what? Everybody?  Record highs.  Well done. And how many years do we have left?  Maybe another eight years to go.

We don't know what's keeping people out of the market but we're here to say it's ok to be bullish.

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