With last week’s powerful finishing stroke, the U.S. stock market continued to thumb its nose at reality, rampaging higher on economic news that seems to be getting worse by the day. Around mid-week, readers of the Wall Street Journal could have glimpsed a perfect storm gathering on the horizon. Numerous articles spread across two inside pages summed up a darkening global economic picture. We learned that China’s economy is decelerating at a rapid pace, Europe’s is dead on arrival despite blather about further stimulus, and even a lean and muscular Brazil has cut interest rates to get in step with increasingly desperate central banks around the world. In the U.S., a carefully spun recovery story was starting to unravel just in time for the election with warnings that Q2 earnings are going to stink. It would appear that the jobless “recovery” is finally starting to take its toll on consumer spending. Henry Ford was right after all: business prospers only when companies are hiring workers and paying them well. Meanwhile, so much for the notion that a lean, mean manufacturing sector is going to lead America back to prosperity. In fact, perhaps for lack of products to sell to the world, the U.S. trade deficit has begun to grow anew. This problem barely gets a mention in the news these days, presumably because other problems, most particularly stagnant U.S. incomes, falling consumer confidence and intractable unemployment seem more immediate and potentially fatal.
Through it all, and despite a global picture that is as grim as any we can recall, the Dow Industrials finished the week with a 204-point upstroke that was as blithe as it was bizarre. Bearish as we’ve been, we saw it coming. The night before, under the headline “Big Dow Rally Ahead?” Rick’s Picks alluded to a technical picture suggesting that U.S. stocks were poised for a powerful surge – one that could add 500 points to the Dow. With Friday’s explosion, we are already 40% of the way there. Although our gut feeling until very recently was that U.S. stocks would collapse this summer, the charts are telling a different story – and we have heeded them. In particular, our key bellwether, Apple, appeared to be getting traction for a run-up to new all-time highs. If so, it seems not merely likely but practically certain that it will lead the broad averages higher. [Click here for a trial subscription that will give you real-time access to our analysis of the stock.] Hard to believe that stocks could embark on a major bull leg, considering the worsening economic picture. Some might infer that it is impossible for the broad averages to collapse, given the tidal swell of funny money that has been unleashed on financial assets by the central banks. It is a gaseous cloud, as far as we’re concerned, and therefore vulnerable to instantaneous collapse. Traders eager to ride the Dow to our target 300 points above current levels should take note of this, with an eye toward the fire escape.
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