By Jim Donnelly, Olson Global Markets
Although overbought conditions are present on long-term charts of the Dow Jones Industrial Average (DJIA), additional upside gains appear likely before testing long-term trend line resistance. That resistance currently sits at 15,840 but rises over time by roughly 50 points per month.
While resistance on the DJIA is not matching up with a similar trend line drawn on the S&P 500 index (which has already broke solidly above its resistance at 1,600), it does oddly correspond with “channel top” resistance drawn off the March 2009 low on State Street Global Advisor’s Spider S&P 500 tracking ETF (SPY). This “channel top” currently sits at 171.20 and represents a 4.77% gain from Friday’s close. Long-term trend line resistance on the DJIA at 15,840 also represents a 4.77% gain from Friday’s closing level.
Clearly, a set of better-than-expected Q1 earnings, a series of promising employment reports, higher real estate prices and, of course, massive QE programs in both the U.S and Japan have teamed up to lift equity prices. Moreover, a number of central banks have already announced their unusual intention to buy equities or equity ETFs to hold as reserves. According to a recent annual survey of 60 central bankers conducted by Central Banking Publications and Royal Bank of Scotland, 23% of reserve managers indicate that they already own equities or plan to buy them within five years. They include the Bank of Japan, the bank of Israel, the Swiss National Bank and the Czech National Bank In total, the 60 central banks polled are responsible for almost $7 trillion held in reserve.
In turn, these unusual circumstances have put pressure on pension organizations, mutual fund managers and individual investors to “chase performance” in order to secure future investment returns.
One problem that could arise, however, is related to currency exchange rates. While the U.S dollar has benefitted recently from foreign investment funds flowing into U.S. equities and real estate, the impact of a higher dollar “down the road” could make U.S. goods and services look expensive relative to products produced or services offered by global competitors. In turn, that could have a negative impact on corporate profits in future quarters.
For the time being, higher equity prices appear probable over the short-to-intermediate term. In future weeks and months, though, the real question will likely center on whether the DJIA and SPY will be able to break above their respective resistance levels before taking a some sort of pause.