Today the market is rallying. China announced a rate cut based on slower growth. Europe has repeated their stance on easy monetary policy. The Federal Reserve seems the only group that speaks of tightening its policy with their end to Quantitative Easing (QE). The rest of the world seems focused on a race toward zero interest rates. The US economy remains strong compared to the rest of the world.
The weekly Dow chart shows a few revealing items. The recent pullback to its 50 day moving average was a good buying opportunity. Based upon volume and market indicators this rally should continue. Pay particular attention to the lows during each of the past 3 market sell-offs which are underlined. In each case the market dropped but then immediately rallied back the same day. These "sell-off tails," as I call them, have telegraphed a later market pullback of greater magnitude. I don't think there is even a name for this pattern in Candlestick analysis. But this is an example of the technicals revealing something that the greater market is not.
The Dow large cap stocks are still paying dividends over 2-3% and are more stable than most banks. As the rest of the world interest rates go lower, say to 1.5%, this should attract capital to US markets, which will in turn, drive US real-rates-of-return lower. Equities should also appreciate to reflect these real rates of return on dividend yields. For example, if GE now pays a 2.5% dividend at $25 per share, its stock price theoretically will appreciate to $41.66 if world interest rates are at 1.5%, assuming no change in dividend. That is phenomenal! And that is why we are seeing the markets rally today.
Remember the "sell-off tails" because they will be important levels of support/resistance after the current rally runs its course.
Note: The above is for informational purposes only. Any decision to buy, sell, or hold a specific investment for a specific portfolio should be reviewed by your investment adviser.
