Dow Jones rally is just starting – JP Morgan; Fear and greed index neutral

Dow Jones
Dow Jones

The Dow Jones is up by more than 1.46% in premarket trading as traders remain optimistic about the health of the global economy. The index is trading at $26,126, which is the highest it has been since June 23. Other global indices are also in the green today.

In Asia, the Shanghai index rose by more than 5% while the Nikkei 225 and Hang Seng rose by more than 1%. In Europe, the DAX index and FTSE 100 rose by more than 1%.

JP Morgan optimistic about the rally

Analysts at JP Morgan believe that the current rally is likely to continue because of the significant amount of dry powder in the market. The bank attributes this to the significant amount of debt that has been created in the past few months by central banks. Indeed, these actions have led to the creation of more than $9 trillion (or 12% of global GDP).

The bank expects that adding $16 trillion of additional debt this year will lead to more than $200 trillion in debt by the end of the year. As a result, these low interest rates and more stimulus will lead to asset reflation. The bank said:

“More credit and more monetary stimulus in the form of QE, both imply more liquidity, i.e. extra money supply and cash balances, which in turn would result in more asset reflation.”

As we wrote a few weeks ago, investors in the United States are currently sitting at more than $1 trillion of dry powder, which will need to be deployed somewhere. And with bond yields at historic lows, we see most of these funds being deployed in equities.

Meanwhile, politicians in Washington are still debating more stimulus to support the economy. Just last week, they extended the Paycheck Protection Program (PPP). Also, Democrats in congress passed a $1.5 trillion infrastructure package. This means that there is a possibility of more stimulus, which will support stocks in the Dow Jones.

Fear and greed index points to neutral

Investors are neither fearful or greedy about the current state of the market. That is according to the latest figure by CNN’s fear and greed index. The index, which measures market sentiment in stocks, has recently moved from fear and I expect that it will move to greed.

Indeed, the junk bond demand, safe haven demand, and market momentum are all in the fear category. At the same time, the put and call options, market volatility and stock price strength are in neutral while Stock Price Breadth is in greed.

Dow Jones technical analysis

The Dow Jones is trading at $26,267, which is higher than last week’s low of $24,850. On the daily chart, this price is above the 50-day and 100-day EMAs and is slightly below the 78.6% Fibonacci retracement level at $27,165. It is also slightly above the ascending trend line that connects the lowest levels on April 2, May 14, and June 29. Therefore, the Dow is likely to continue moving higher as bulls target the next resistance at $27,633.

On the flip side, a move below $25,287 will invalidate this prediction. This price is at the intersection of the 100-day and 50-day EMA and the ascending trend line.

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