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Here's Why A Market Correction Could Be Over

Mark Carney, the Governor of the Bank of England, has eaten humble pie.

In March 2016, he said that dropping out of the European Union would be the ‘biggest domestic risk’ to financial stability in the UK. In May that year, Carney said Britain could fall into recession if it leaves the EU.

He was dead wrong.

Despite his false warnings, Carney hasn’t stopped trying to make a right. According to Investing.com, Carney told bitcoin enthusiasts at London’s Regent’s University:

It has pretty much failed thus far on…the traditional aspects of money. It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange.

Has Carney eaten humble pie once more? Who knows…

Bitcoin is trading above US$11,000 this morning. Someone bought $900 million worth of the cryptocurrency over the past week. That said, despite the near 50% bounce since 6 February, Carney seems on the money with this call.

Bitcoin is a failure.

Few people use it as a currency. It’s too volatile, the transaction costs are too high, and it’s difficult to store and secure. That’s why we keep on saying that you should stick to what’s known to work: stocks.

Is it safe to buy stocks?

The Dow Jones Industrials Average jumped 4.3% last week. That’s the best weekly performance since 2016. Can it get better? Investing.com explained yesterday:

In a note on Monday, BlackRock’s global chief investment strategist Richard Turnill pointed to tax cuts in the United States and government spending plans as driving earnings growth and said the ratio of earnings upgrades to downgrades for U.S. large-capitalization companies was at its highest since records began in 1988.

Turnill said the “swoon” in equity markets in early February made U.S. valuations look more attractive, pushing the company’s three-month view on U.S. stocks to “overweight,” from neutral. It is BlackRock strategists’ first outright positive reading on U.S. stocks since May 2016.’ 

BlackRock’s analysis means nothing for the average Joe. Stock market valuations have been stretched for years. That’s because central bank money printing and ultra-low interest rates have distorted asset prices. The combination has sent capital into stocks, as bond yields look unattractive.

It’s that simple.

Earnings growth and ratios mean nothing in today’s world.

Now that interest rates are rising in the US and bonds are taking a hit, portfolios need to be rebalanced from a risk perspective. Stocks were sold to account for the increased volatility and balance portfolios.

Thanks to money printing and ultra-low interest rates, all asset classes have under-priced risk.

The markets became complacent.

Most people thought that stocks ‘only go up’. And that’s still the case. BlackRock’s analysis is an example of this.

But, in a world influenced by central banks, we should expect the unexpected. That’s why it’s worth asking: Is the stock correction over or are we due for another dip?

Look at the daily chart for the Dow Jones:

Dow Jones Daily Chart 21-02-2018

Source: Tradingview.com
[Click to enlarge]

The intersection of the pink, lower black and lower blue trend lines shows the 23,360-point support level. The Dow bounced off that last week, which could be the correction low.

The pink trend line shows resistance from March to September last year. The market took six months to breakthrough to higher prices. When the market breaks through resistance, it often comes back to retest it before moving higher. It’s common that major resistance ends up becoming major support.

That may have happened last week…

The lower blue trend line added additional support to this thesis. It’s a parallel of the upper blue resistance line. Before the market broke through the pink resistance line last year, the blue resistance line acted as strong support from the July 2016 Brexit low.

Finally, when the market broke through the pink resistance line, the upper black line became major resistance. It also marked the high of last week’s bounce. Now, drawing a parallel of the upper black trend line from the November 2016 US election low, the lower black trend line also showed support for the recent correction at 23,360 points.

The bottom line: There’s a good chance the correction is over. But we could see a re-test of the 23,360-point low in the weeks ahead. If that happens, we will be buying with our hands wide open.

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