NEW YORK (Reuters) - The U.S. stock market may still be in a bull phase that will boost the Dow Jones industrial average to 16,000, but investors should brace for periods of sharp consolidation, said technical analyst Louise Yamada.
“Near-term pullbacks are an important part of a bull market,” Yamada, managing director at Louise Yamada Technical Research Advisors, said at the Reuters Investment Outlook Summit in New York. “I suspect there’s some more selling to come, but the stock market doesn’t have major structural problems yet.”
Yamada said strong global growth, most notably in developing nations, has been helping offset sluggish domestic economic performance.
“Global growth and the arrival of 2 billion people and new consumers may be having a ‘bull-market’ impact on markets similar to what we’ve seen in the postwar period in the ‘40s and ‘50s,” she said. “We may be replicating that incredible economic bull market, but this time, with the help of growth elsewhere, such as in China.”
A drop in the Dow industrials .DJI of nearly 5 percent in February was a sign that the market was becoming more selective, Yamada said. Intermediate-term charts are more supportive of future strength, she noted.
Yamada said she defines any drop between zero and 10 percent in stocks as a “consolidation,” between 10 and 20 percent as a “correction” and above 20 percent as a bear market.
“But there’s so much leverage out there these days, that makes these pullbacks harder to stomach,” she said. “Trading ranges are so wide these days and even a 2 percent loss could be lot for an individual investor to stomach.”
Now, she added, some of the main threats for the bull market scenario in the United States are protectionism and a liquidity crunch.
“Or, if interest rates go up fast,” he said.
Yamada also noted that despite recent gains in the U.S. dollar, the currency remains in a structural-decline trend. The greenback, which is now trading at an index of 82.7 against a basket of six other currencies .DXY, touched 81.25 earlier last month, but it may still drop to levels below 80.
“The dollar is deflating. We are printing it like crazy, because growth led by consumer and government spending leads to a weak currency,” she said. “A level at 80 on the spot dollar index is our critical level. Our work suggests that over time it’s going to break 80.”
The continued slide, she added, combined with growing anti-American sentiment and the rise of other regional economic powerhouses like China, may cause the U.S. dollar to lose its status.
“The hostility we have created globally, fostered with all these bad decisions, are contributing to central banks’ decision to diversify out of the dollar and people now are paying oil in euros,” Yamada said. “That’s the beginning or the early steps of the dollar losing its status as a reserve currency. I wouldn’t be surprised if in a couple of decades China becomes the economic leader and the yuan becomes a world-leading currency.”
Yamada said the energy and the materials sectors are the least correlated to fluctuations in the U.S. dollar and have the potential to gain further. In contrast, she said housing stocks may be ripe for another round of declines.
She also favors commodities and said her technical analysis points to further gains in the CRB Index .CRB, which tracks the performance of the world's major commodities.
Our Standards: The Thomson Reuters Trust Principles.