Why Markets Continued To Rally Despite Seriously Weak Economic Data

The Dow Jones Industrial Average traded ended last week at 24,242.49, down 15.1% year-to-date and 18% below its all-time intraday high of 29,568.57 set on February 12. The Dow is in a bull market consolidation, up 33.1% above its March 23 low of 18,213.65.

I continue to follow the monthly chart for the Dow and its 120-month simple moving average. My reason for calling for a bear market correction is that this moving average (now at 18,144) held at the March 23 low.

Now we track the Dow “Hats” as they recover Dow 19,000 through Dow 24,000. My monthly and quarterly risky levels are above Dow 25,000 at 25,237 and 26,091, respectively.

The reasons for the continued rally despite seriously weak economic data include the following:

·  When stocks miss earnings estimates or offer cautious guidance it does not matter when these companies are being bailed out by taxpayer money.

·  There are favorable developments regarding Covid-19. For example, Gilead’s Remdesivir has been easing symptoms for most the patients being treated by this drug.

Here’s The Weekly Chart For The Dow

Courtesy of Refinitiv Xenith

The weekly chart for the Dow Jones Industrial Average has been upgraded to positive with the average above its five-week modified moving average at 23,903. Its 200-week simple moving average or “reversion to the mean” is rising at 23,721. Its 12x3x3 weekly slow stochastic reading rose to 33.93 last week, up from 29.79 on April 10.

My upside targets are the monthly and quarterly risky levels which are the horizontal lines at 25,237 and 26,091, respectively.

My Dow Hat Indicator

Since the 2016 presidential election the Dow Jones Industrial Average began to climb above 1,000-point milestones beginning with Dow 18,000. Each time a new milestone was reached the traders on the floor of the New York Stock Exchange passed out baseball hats with the latest milestone on the hat.

Since Dow 18,000 there have been 11 additional hats passed around up to the Dow 29,000-Hat which was crossed as 2020 began. The Dow slipped below each of these hats between February 21 and March 23. That is a lot of lost caps within one month.

Last Friday, the Dow briefly closed above the 24,000 hat. The “Dow Hat Indicator” rose to 55% (6 divided by 11). The Dow gained back more than half the hats.

Dow 22,000 was crossed on April 6. Dow 23,000 was crossed on April 7 and Dow 24,000 was crossed on April 17. The “Dow Hat Indicator” weighs each 1000-point move equally. As the Dow rose from 18,000 to 29,000 each 1,000-point rise was a smaller percent gain.

How to use my value levels and risky levels:

The closes on December 31, 2019 were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Second quarter 2020 and monthly levels for April will be established based upon the March 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

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