Although the Dow Jones Industrial Average (DJIA) hit an all-time high of 16,631.60 last week, it did not actually break above long-term trend line resistance that now sits at 16,750. While overbought technical conditions remain in place on monthly charts, they do not on the weekly time frame. The absence of such a condition on weekly charts could suggest that a modest consolidation may now be underway. At the very least, a clear rotation out of high multiple stocks into value names has occurred.
Another point of interest to consider is that the earnings season is soon coming to a close. The numbers thus far have reflected a slowdown in the rate of earning growth to the 1.4% range from the 14.7% surge posted in Q4 2013. It is fair to argue, however, that weather conditions during Q1 2014 did play a meaningful role in the earnings growth slow down. Given that handicap the recent earnings numbers, while not impressive, may not be bleak either.
And while the latest jobs report showed stronger-than-expected headline numbers, the participate rate and the shrinkage of the total work force were disturbing. Still, an increase in the non-farm payroll numbers did kick up a notch, which is a plus.
All in all, a consolidation of some sort for the Dow Jones Industrial Average (either sideways or to lower levels) may result in the weeks ahead as long as geopolitical tensions do not escalate sharply. Most investors are aware that food inflation is on the horizon (a byproduct of weather related issues) and investors to some degree may have discounted that prospect. It is the geopolitical climate that is much more difficult to predict. As a result, if the DJIA can hold above key trend line support currently at 15,770 investors will likely remain positive. A solid break below that level would likely be troubling to them, instead.
Jim Donnelly, Olson Global Markets