Investors tire of ‘risk-off’ mentality

Price at time of writing – 15,303

My last Dow update on 6 May maintained a bias to buy the index, suggesting a pullback to 14,735 would provide the textbook opportunity.

Although the anticipated Dow fall did occur last week (from a very overbought relative strength reading), the intraweek low of 15,180 was as good as we got. Perhaps it will be as good as we get too, with investors already tired of their flirtation with a 'risk-off' approach. 

What we have recently been witnessing on global share markets is precisely what I have highlighted many times over the past four years; that hoarding of cash would eventually lead to an explosive 'reverse capitulation' (out of cash and into shares). We appear to have reached the stage now where investors have realised that negative real returns on cash will eventually send them broke. This is exactly what Ben Bernanke and the US Federal Reserve has wanted from the beginning. They will not say so in such frank words, but if you won't engage your sidelined cash to a greater good, you will be financially punished. It is encouraging to read that the Swiss National Bank is considering the introduction of negative nominal interest rates on banks' excess deposits (where a significant portion of this sidelined cash resides). If implemented, this too will help in stoking the equity fires.

Given the new target on the Dow is a band defined as 16,023-16,186, there is sufficient upside remaining to buy the index. It is not as low risk a trade as I would have liked (ie by buying on an extended fall to 14,545), but a near-5% upside provides adequate reward.

Recommendation: Buy. Target 16,175. Stop-losses can be applied on momentum below 14,390. 

Dow Jones chart

 

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