Why DJIA may slip back to

Financial Mirror (Cyprus) - - FRONT PAGE -

Most me­dia and an­a­lyst fore­casts call for the Dow Jones In­dus­trial Aver­age (DJIA) to re­main at about 17,000, or for it to plow ahead to­ward 20,000. The June jobs re­ports was good enough to lift the mar­ket, and hope that a surge in cor­po­rate prof­its will press the mar­ket higher for the next two months in­creases by the day. How­ever, there are four rea­sons the DJIA could quickly shed its gains and drop back to 15,000, where it traded as re­cently as last Oc­to­ber.

The first and per­haps most dan­ger­ous threat to the Dow’s ad­vance is a ma­jor flare up in the Mid­dle East, Ukraine or Cen­tral Africa. There is plenty of prece­dent for this kind of dan­ger harm­ing the mar­kets.

A sharp ride up in oil prices un­ques­tion­ably threat­ens the Amer­i­can econ­omy. Fric­tion with Rus­sia chal­lenged trade re­la­tions with the eighth largest na­tion by gross do­mes­tic prod­uct (GDP). And vi­o­lence could flare con­sid­er­ably in more than one coun­try si­mul­ta­ne­ously.

There are not ex­pected to be many earn­ings “misses” for the sec­ond quar­ter. The econ­omy has ap­par­ently re­cov­ered enough so that most sec­tors and huge com­pa­nies should do well, rel­a­tive to per­for­mance for the past two years. How­ever, the mar­ket gets anx­ious when sev­eral of the large com­pa­nies in the United States un­der­per­form ex­pec­ta­tions within a few weeks of one an­other, par­tic­u­larly if many of them warn of a weak third quar­ter, or worse, trou­ble for the bal­ance of the year. Cer­tainly a se­ries of misses among large re­tail­ers like Wal-Mart Stores Inc. (NYSE: WMT) would make traders anx­ious about con­sumer spend­ing. Tech continues to be the most rapidly ex­pand­ing sec­tor among the largest in­dus­tries. The mar­kets would be in­jured if pub­lic cor­po­ra­tions like Ap­ple Inc. (NAS­DAQ: AAPL), Face­book Inc. (NAS­DAQ: FB) and Google Inc. (NAS­DAQ: GOOG) warn all at once.

The most ob­vi­ous and most sim­ple-minded rea­son for a sell off is that the mar­kets be­come too ex­pen­sive. Since the opin­ion is en­tirely sub­jec­tive, some large group of in­sti­tu­tions would have to make the judg­ment al­most si­mul­ta­ne­ously, even if for dif­fer­ent rea­sons.

The mar­ket has the habit of sell­ing down bru­tally when huge in­vestors take money off the ta­ble. It is a scene that has oc­curred over and over again back as far as the cur­rent in­dices have been the mea­sures of mar­ket value.

Fi­nally, GDP and un­em­ploy­ment are ex­pected to con­tinue to im­prove, and im­prove at an ac­cel­er­ated pace. GDP fell 2.9% in the first quar­ter. Based on the job ad­di­tions in May and June, that fig­ure is seen as an aber­ra­tion that will be quickly washed away by the end of a bru­tal win­ter, im­prove­ment in hous­ing and on­go­ing re­cov­ery in em­ploy­ment. Ex­pec­ta­tions are high enough that should the econ­omy only add 200,000 jobs in July or GDP be posted at less than 2% for the sec­ond quar­ter, it would send waves of worry over the mar­kets. A de­cel­er­a­tion in ei­ther num­ber would be a cause for un­der­min­ing fore­casts that the bal­ance of 2014 will not be a strong as ex­pected, at least as mea­sured by the ma­jor yardsticks of eco­nomic ex­pec­ta­tions.

One or two pieces of bad news could send the DJIA back to 15,000 just as fast as, if not faster than, the pace at which it rose to 17,000.

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