Good day ladies and gents! Here’s my take on the US economy. In today’s feature is actually the daily chart of the Dow Jones Industrial Average or DJIA. For those who do not know, the DJIA or DJI is the stock index of the 3o biggest US companies. The index of course, reflects the present average prices of the included companies. Positive or negative sentiment towards any one of these firms are of course “priced in” in their respective valuation and in the index as a whole. So if these companies do well, then the demand for their shares would increase, thus, increasing their price as well and vice versa. Given this, the index, aside from the S&P 500, can be pretty much be used as a leading barometer of the US’s economy.
Anyway, as you can see from the chart, the index has been rising since it hit a low of 6,470.11 back in March 2009. Last April 26, 2010, it reached a high of 11,258.01, almost doubling its valuation, before cooling down. It seems, however, that the index has already lost its upward momentum. worse, it looks like it is starting to reverse by forming a head and shoulders pattern. If the index breaks out from this pattern and falls below the marked neckline, it could slip all the way somewhere near 8,000.00. That’s a drop of at least 2,000 points from the current market price so beware! A breakdown from the pattern could indicate that the US is back in the bear market again – a double dip recession I should say.
Recent economic data in the US are far from satisfactory. Both existing and new home sales have been down for the last 2 months with them even falling below the market consensus. Core durable goods orders have also fallen way short, in fact, it even unexpectedly contracted by 3.8% in July. The manufacturing activity at least in the US’s east side as gauged in the Philadelphia Fed manufacturing index has also been dreadful. the index fall back to -7.7 from 5.1, the first time it touched negative in 12 months. So with lending and consumption still subdued despite the Fed’s low interest rates, perhaps the US government could once again reinstate the tax rebates on big item purchases like cars and houses last year. This could jump start the economy, at least in the spending part, in the very near term. A lack of positive catalyst, however, could only drag the economy into another contraction or recession.