It’s likely that ardent followers of Dow Theory can hardly contain their excitement. This technical indicator for the Dow Jones Industrial Average (DJIA) is on the verge of confirming the market’s bull status. Marketwatch’s Mark Hulbert wrote yesterday that a bull market would be confirmed by Dow Theory if the DJIA closes above its April high of 12,810.54. Today’s close left the DJIA 153 points (about 1 percent) shy of that mark.
Luckily, in addition to the indicators outlined above, market signs are indicating it soon will. Hulbert says the two S&P sectors to watch are industrials and transportation. The DJ-Transportation Index has already topped previous highs but industrials have “refused to join.” After yesterday’s move higher, industrials were only about 1 percent shy—the same as the DJIA overall—from previous highs.
If this technical data doesn’t convince you, maybe improvement in the global economy will. It’s true today’s jobs report was dismal and second-quarter 2011 U.S. GDP growth is expected to come in around 2 percent for the second-straight quarter. However, there were several encouraging developments this week.
We received our first dose of clarity on the Greece sovereign debt issue and it looks like calamity has been averted. The Chinese government, which has been tightening policies to keep the country’s economy from overheating, announced its third interest rate hike this year. This likely is the end of China’s tightening measures and its economy should react positively.
There’s also positive momentum building for the U.S. economy. Manufacturing strength is the foundation of a growing economy, and currently both the services and manufacturing Purchasing Managers Index (PMI) remain above the benchmark 50 level, says ISI, indicating expansion. One bright spot is the auto industry, our trusty indicator of the global economy’s fortitude (Read: Booming Global Auto Market Good for Many).
A supply shortage and slowdown in sales as a result of the Japanese earthquake caused many car manufacturers to initiate their annual plant shutdowns early this year. The shutdown time is used to perform maintenance on facilities and restock supply. Automakers such as Ford and General Motors have already completed their shutdowns and are “starting their engines” for a strong second half.
U.S. auto production is forecasted to be up 16 percent in July over the previous month and overall production during the third quarter of 2011 is expected to be up 86 percent on a quarter-over-quarter basis. ISI says this would likely raise America’s real GDP by 1 percent.
Who will buy all these cars? Chinese and Americans.
Despite the tightening measures mentioned above, Chinese citizens are expected to purchase 18.5 million vehicles this year, which would be about a 3 percent increase from 2010. ISI says owning a car remains the “#1 most desired consumer durable” in China and estimates the country could reach sales of 30 million per year by 2030.
At home in the U.S., vehicles sales have been on an uptrend since early 2010. The chart shows current levels are still well below the highs of the mid-2000s but are comparable to the early 1990s—just about the time the U.S. economy was beginning to speed up.
The biggest question mark surrounding the direction of the market right now is geopolitical. How the debt ceiling issue is resolved and how companies digest new regulations could decide whether the bull market gets caged. J.P. Morgan-Chase CEO Jamie Dimon passionately told the Federal Reserve last month that some of the floated ideas could spell “suffocation through regulation” for the U.S. economy. Dimon questioned whether anyone had “bothered to study the cumulative effect” of all the new regulations. PIMCO CEO Bill Gross has echoed similar statements.
We share many of these concerns but feel the fundamentals of U.S. economic growth can power through these regulatory hurdles. Long-term investors must remember that it’s time in the market, not timing the market. The market may not soar into the stratosphere like today’s shuttle launch, but investors who catch the bull and participate could see gains over the next few months.
Frank Holmes is the CEO and chief investment officer for U.S. Global Investors. John Derrick serves as the firm’s director of research and portfolio manager.
