Dow Jones May Fall as Recent Bull Move Slows

By Dale Gillham | Published 11 May 2020

Last week the Dow Jones Index was up 2.56 percent and looking at the broader market the S&P 500 was up 3.5 percent, indicating the market is strong, but is it? For the calendar year, the Dow Jones Index is still down 14.74 percent while the S&P 500 is down 9.32 percent, and technically neither are in a crash or a bear market. That said, the US stock market is disconnected from what is unfolding in the economy, therefore, the current rise is looking more like a sucker’s rally.

If we look at the NASDAQ, it is also up 5.58 percent for the calendar year, as technology companies such as Apple, Microsoft and Nvidia continue to do well. So with everything looking bullish, you may be asking why I believe the current move is a sucker’s rally.

Retail traders and investors are looking very short term at present, which, in my opinion, means they are gambling with their money. If we look a little further back on the Dow Jones Index, we find that while the market traded up last week by 2.56 per cent, it has only traded up 2.5 percent over the last 20 trading days. Remember, it rose 30 percent in 13 trading days from the low on 23 March, so rising 2.5 per cent in the last 20 days means the Dow Jones Index is slowing and most likely at a tipping point.

When looking at the US economy, last week it was announced that unemployment hit 14.7 percent given that 20.5 million jobs were lost because of shutdowns due to the corona virus outbreak. This is the highest figure we have seen post the war and the great depression, where around 1 in 4 people were unemployed.

We also need to remember that unemployment was at 3.5 percent in February, so this is a huge jump. That said, the figure is not that bad, as analysts were predicting a figure of over 15 percent. Analysts were also reporting that around 90 percent of the 20.5 million jobs lost were temporary jobs with the leisure and hospitality industry being the biggest loser followed by retail.

However, the market rising while unemployment has grown so dramatically is not really the big issue. Rather, it is the assumption that as we open the boarders that the unemployed will get their jobs back and start to spend to stimulate the economy, which I believe is very questionable. To think that everything will get back to normal quickly and that cash strapped employers will be able to afford to reemploy those they had to fire is a big ask. On top of that is the unemployed themselves - if you have been unemployed for any length of time, you will be playing catch up on loans and other bills for quite some time.

In another sign of disconnect in regards to the market and reality is what is going on with some companies and their stock prices. For example, Uber which has never made money in its entire history, is again weaker with its ride sharing revenues down around 80 percent in April, which is not surprising given that the corona virus would have had a big impact on people using such a service. I am also expecting weaker numbers for May and their second quarter earnings to be down as a result. That said, the downturn has been offset somewhat by Uber Eats, which has gained during COVID-19 shutdowns. But the real disconnect is that Ubers stock price is up 139 percent since 18 March, despite it recently posting a $3.5 million loss.

On another note, oil seems to have steadied after cutbacks in production, so we may see prices slowly start to rise. Interestingly, oil stocks such as EOG Resources rose over 15 percent last week even though they plan to cut their capital budget by an additional $1Billion and first quarter earnings fell over 90 percent from a year ago. When we look at the stock price of EOG, surprisingly we find it is up 90 percent since 18 March. Schlumberger, another oil stock, has also closed three plants and yet it is up 14 percent in price despite only two weeks ago reporting revenue and profit dropping while cutting jobs. When you look at these examples, you can understand how disconnected the market is to the economy. 

For now, good luck and good trading.

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