Dow still heading towards 17,778

Price at time of writing – 16,511.

My recent updates on US share markets have grown increasingly positive.

This follows my long-term upside targets being fulfilled last November, an event which drove my overly cautious advice throughout the first quarter of 2014. My recent buy recommendation was based on a break above nuisance resistance at 16,559; an outcome that now clears the way for the Dow Jones to rise as high as 17,778.

The recent Bank of New York Mellon fixed income event in Paris saw notable speakers raise the ugly spectre of European deflation. Both Jurgen Stark (German economist and former European Central Bank member) and David Leduc (chief investment officer at Standish Asset Management), warned of complacency about the threat of deflation, and of the eurozone being exposed to a prolonged period of falling prices. If the balance of risk is to deflation, as I firmly believe it is, then the ECB will need to start acting to avert the threat sooner rather than later. A eurozone quantitative easing program would likely spark the next phase of strength in global equity markets.

The central investment theme I wish to convey is that deflation, not inflation, will prove to be our biggest future economic challenge. If correct, global interest rates will stay lower and for longer than where the current consensus of opinion lies.

Recommendation: stay long. Target 17,778. Stop-losses can be activated on momentum below 16,175.

Dow Jones chart

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