The Dow Is At a Major Inflection Point

Posted by jbrumley on August 1, 2017 2:17 PM
yes-no-decision

Based on nothing more than sheer momentum, it's tough not to like stocks right now.  The rally just won't die even though its obituary has been written several times, so much so that the few doubters have finally learned to not voice -- or trade -- their pessimism.

In many regards though, that lack of doubt may well be a reason to start betting against the market. Once everyone agrees the bullishness will never end, most investors are already off the sidelines and into positions. There's nobody left to do the next round of buying.

Underscoring that possibility is another detail that so far hasn't made the media's usual circuits. That is, the Dow Jones Industrial Average is on the verge of a major milestone. If history repeats itself, this could be where the tide turns in the other direction and the sellers dig in while the profit-takers scale out.

Next Stop, 22,000

The rationalization of numbers ending in "00" (or "000" for the Dow) as floors and ceilings for major market indices is neither new, nor rational. Traders just like to apply logical frameworks when there are none, and big round numbers are the most logical levels the market's participants can subconsciously agree to use as inflection points.

With that as the backdrop, though the Dow Jones Industrial Average has yet to reach 22,000, Tuesday's high of 21,991 is for all intents and purposes a brush with the pivotal 22,000 mark. If it's not quite yet at the precise ceiling, it will be soon enough, forcing traders to make a tough decision.

080117-dow

That decision doesn't have to be a bearish one, mind you. As the chart above indicates, the last two bumps into previous "000" ceilings were only pauses... reasons for the bulls to regroup and set the stage for the next leg of the rally. On the other hand, the Dow has now blown past three "000" levels since November, and is knocking on the door of the fourth. Indeed, the Dow Jones Industrial Average's 22% romp since early November has been almost miraculous, and easy to fear.

Bottom Line

It will take some time for the decision-making to take shape, meaning even if the bulls decide to take aim for 23,000, look for some turbulence around these levels as the bulls grapple with the bears. It may take a few weeks to sort it all out.

On the other hand, don't be afraid to believe the unbelievable -- and act accordingly -- once the dust settles. The market is intentionally tough to handicap,  and throws curveballs most traders aren't ready for.  A meltdown is no less likely than a meltup from here, and perhaps more so now that valuations have become uncomfortably frothy.

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