DAR Wong: Dow Jones Bull – Where Is the Top?
By DAR Wong
Exactly a year ago, US Dow Jones Industrial Average was trading at 19,800-point level when Presidential candidate Trump contested eagerly against Hilary Clinton. Analysts predicted that Clinton would emerge as the winner as she has been epitomised in broad favour among the US media and voters. In fact, many financial experts sneered the unlikely victory of Trump, saying that he would only plummet the American economy!
When trump won the national polling and became the 45th President of United States, Dow Jones Futures market plunged on that day but quickly recovered within three days, although jitters remained in stock market. Then-Federal Reserve Chair Janet Yellen even “threatened” her resignation in response to the menace of Trump’s policy during his rally!
Against the odds, the Dow conquered the 20,000-point critical level in last year February, catching many short traders off guard. In 2Q17, President Trump reiterated numerous times that his tax cut reform would create huge cash liquidity in the market, and his proposal for nationwide infrastructure building would stoke inflation.
Despite many of Trump’s scandals such as Russia involvement in his Presidential victory, some sex scandals involving a few women, withdrawal from Trans-Pacific Partnership, the reversion of Paris Climate Treaty and so forth, the Dow did not falter and continued to rise steadily. This was further backed by stronger earnings performance in most of those large US companies.
Last month in December, the long-awaited US tax bill cut was finally signed into law by President Trump. The commencement was backdated to the beginning of 2017. No one would have had a clue from 11 months ago that the Dow would rise to new historical high above 25,500-point level. Then, in the start of 2018, Dow once again surprised many short-sellers, after it crossed 26,000 points!
Weakening Dollar is definitely supporting US stocks in general. However, we reckoned that the huge cut in US corporate tax rate – from previous 35 percent to current 20 percent – was the major contributor to lifting US stocks higher. This is because there is more money available for re-investments! The sudden creation of massive cash liquidity is as good as an interest rate cut albeit the Federal Reserve’s interest rate hikes.
Although the Dow has risen a remarkably by over 30 percent since Trump’s inception, we reckon there could be some more rooms to grow, at least till mid of 2018. This is a transitional period for digesting the tax cut reform and the weakened dollar strength.
Unfortunately, investors may see downside risk surfacing in the second semester, in-lieu of two possible rate hikes. Next month, the new chief of US Federal Reserve Jerome Powell will replace Janet Yellen and advance his plans for rate hikes. Most probably, that would occur in the later half of 2018.
Technically speaking, Dow has advanced into uncharted territory and we are unable to gauge the next resistance. Retail investors are beginning to turn crazy and starting to throw their hard-earned monies into the stock market and betting for a brighter sunshine. According to our forecast, the Dow could scale up to 27,800 around mid-year, stopping short of the expectation that it will hit 30,000.
In fact, when all investors turn fearless in the stock market, that will be the time for you to start pondering and plan for retraction. Trade well and watch the timeline till our predicted price target. Do not forget to manage your risk when your entry price turns 10 percent adversely against you!
DAR Wong is a registered Fund Manager in Singapore, a columnist at Shares Investment and a speaker at our investment seminars. The opinions are solely at his own. He can be reached at dar@pwforex.com.