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Dow’s Relentless Surge Shows Signs of Slowing as Markets Ponder Overvaluation Risks

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The Dow Jones Industrial Average posted its seventh straight record close on Thursday. However, growth came by the narrowest of margins as Wall Street tempered its appetite for stocks.

The Dow’s Remarkable Story

Earnings results from several blue-chips have pulled the Dow Jones into record territory. Gains continued on Thursday, with the index inching up less than one-tenth of a point to 22,026.10. That represents a year-to-date return of 11.5%.

But amid the euphoria are signals that the Dow may be approaching its top. Of course, very few of us recognize that the top has occurred until it’s too late. That was certainly the case during the last two financial crises.

Are We Nearing the Top?

Barron’s recently identified three eerie characteristics that have defined some of the biggest market tops in history.  They include overvaluation, a struggling financial sector and significant divergences.

Overvaluation represents much more than how investors feel about a particular stock. Value indicators such as price/earnings, price-to-book and price-to-dividend ratios have done a pretty good job of signalling when the market is overvalued. While these indicators alone do not prove that the market has reached its tipping point, almost all tops in history have begun when these indicators became overvalued.

A struggling financial sector is also a precursor to a peak, as we saw in the post-1970 bull market and then again in 2007. When financials begin to sour, investors should seek refuge.

Significant divergences are another indicator of an unhealthy market that is about to peak. When divergence occurs, fewer stocks participate in the uptrend. This can only go on for so long until the market begins to buckle.

Based on this analysis, the Dow Jones may be approaching a market top, but isn’t there yet. Aside from overvaluation, there isn’t much evidence of divergence and even fewer indications that financials are about to crumble.

Attention Shifts to Politics

President Donald Trump, who many say is the chief catalyst behind the latest bull run, is looking keep the rally going indefinitely. Failing healthcare reform, the president is turning his attention to immigration and free-trade. The Trump administration has already put forward a plan to curb illegal immigration and boost the retention of skilled workers. Beginning Aug. 16, the administration will also embark on NAFTA renegotiation with Canada and Mexico.

While August is typically a slow month on Wall Street, political specter will provide plenty to talk about.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 548 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Market Overview

Finally Fighting Back

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Hi Everyone,

Perhaps one of the most revered personalities in the crypto world is Vitalik Buterin, the creator of Ethereum. His pioneering work on smart contracts is arguably one of the most important technological advancements in the development of cryptos.

Ethereum’s co-founder Joseph Lubin recently stated on Bloomberg that he doesn’t see the current falling prices as a hindrance to growth and I have to agree with him there.

What might prove to be a hindrance though, is the sheer popularity of the Ethereum network. As we saw with Bitcoin in early December, the Ethereum blockchain is now seeing times of stress as there are more transactions than the miners can confirm in a timely manner.

This morning, Vitalik provided a 75 tweet report on the network’s multiple paths forward, including the much anticipated Casper upgrade.

The good news is that the Ethereum developers seem to have good solutions for most of the issues. Unfortunately though, the timeframe remains elusive with some experts estimating that it could take more than a year to properly scale the busy network.

Many agree that decentralized applications will play a prominent role in our daily lives in the future. Currently, Ethereum is the prevailing platform for the creation of these dApps. What’s clear today is that they will have to work very hard to keep it that way.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Trump & China – Talking Again
  • Dollar Step Back
  • Crypto Also Rebounding

Please note: All data, figures & graphs are valid as of August 16th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

Markets are breathing a sigh of relief this morning as

The Turkish issue is still far from resolved, but it seems that Angela Merkel has been able to make some headway on the issues. In any case, this spat has roiled markets far more than it probably should have and it’s good to see things returning to some level of normality.

Asian and European markets have started out in a good mood. Let’s hope it sticks.

Dollar Pullback

Along with this positive risk sentiment, we do see some much-needed signs of weakness from the Greenback.

Most of the Emerging Markets currencies that we saw falling apart at the beginning of the week are now fighting back hard.

Here we can see the USD falling today against the Lira, Rand, and the Peso…

Even though the precious metals did continue to get hammered throughout the day yesterday and most of last night, they do seem to be rebounding this morning.

Crypto Fighting Too

Not to be left out, the crypto market also seems to have found relief in the Dollar’s pullback.

The markets are now seeing some much-needed calm after the declines of the past two weeks, which seems to have culminated with Tuesday’s plunge.

Let’s have an excellent day ahead!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,

Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 122 rated postsSenior Market Analyst at Etoro.com.




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Analysis

Pre-Market: Trade War Optimism Sparks Another Bounce in Stocks

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Global stocks are markedly higher today before the US open, Donald Trump’s quite aggressive negotiating seem to be paying off, at least with regards to China, as in the wake of the pronounced weakness in Chinese assets, and the notable slowdown in the economy, the country wants to reopen the talks with the US.

Shanghai Composite, 4-Hour Chart Analysis

The Shanghai Composite hit a new bear market low overnight before recovering above support into the close, and the Dollar’s rally also ran into resistance, thanks to the Yuan’s bounce of its fresh 13-month low. Emerging market assets are also somewhat higher today, with the help of the Turkish Lira’s continued bounce, but the segment is still deeply wounded technically, and more pain is almost inevitably ahead, as the negative trends still stand.

 

DAX Index, 4-Hour Chart Analysis

Walmart’s great earnings report also fueled the pre-market rally in US futures, as the retail segment in the largest economy still seems to be doing just fine, despite the global woes. The major US indices are after an orderly looking correction, in stark contrast with their European and Asian peers, which are stuck in broader downtrends or even full-blown bear markets.

Nasdaq, 4-Hour Chart Analysis

Yesterday’s tech selloff, which was triggered by the weak report of Chinese giant Tencent has almost been erased after the better than expected numbers of Cisco restored confidence in the market-leading segment. Nvidia (NVDA) will also report after the market close, and as the earnings season is drawing to a close, we can conclude that corporate profits had a blowout quarter in the US, even as cracks in the global economy appeared.

Momentum is still clearly on the side of the FAANGS and the whole US tech sector even after discounting Facebook’s recent plunge, but should the tightening cycle of the Fed continue to drain liquidity from financial markets and should the rising trend in rates persist, we expect valuations to suddenly matter soon.

Dollar Pulls Back

Dollar Index (DXY), 4-Hour Chart Analysis

The possible resumption of the US-Chinese trade talks sparked a, so far, weak correction, which also due from a technical standpoint, with the EUR/USD pair finding support near $1.13, and with the broader Dollar Index running into resistance near the 97 level. The rally in the reserve currency is no danger by any means, as the break-out is clearly intact, but a deeper pullback would help risk-assets in the coming days.

WTI Crude oil, 4-Hour Chart Analysis

Commodities are slightly higher thanks to the relief rally in emerging markets and the dip in the Dollar, but the previously stronger crude oil is just holding up above the $65 support, while gold is clearly below $1200, and copper couldn’t get back anywhere near yesterday’s break-down level close to $2.70.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 318 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Market Overview

Market Update: U.S. Stocks Fall on Trade, Emerging Market Tensions; Cryptocurrencies Recovers $20 Billion

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Stocks and commodities faced brisk selloffs Wednesday, as lingering risks on the trade and emerging-market fronts dampened investors’ appetite for riskier assets. Meanwhile, cryptocurrencies staged a large relief rally led by bitcoin and Ethereum.

Stocks Decline

Wall Street’s major indexes finished well off session lows on Wednesday. The Dow Jones Industrial Average closed down 137.51 points, or 0.5%, at 25,162.41. The broader S&P 500 Index declined 0.8% to 2,818.37. Both averages were down more than 1% earlier in the day. Meanwhile, the technology-driven Nasdaq Composite Index fell 1.2% to 7,774.12.

Losses were spread out across seven major sectors, with energy shares falling 3.4% as a whole. Materials, tech companies and discretionary shares also fell more than 1%.

The CBOE VIX, also known as the fear index, rose by as much as 27% to reach 16.86. VIX settled at 15.05, gaining 13.1%.

Oil Prices Sink to Two-Month Lows

Crude plunged to more than two-month lows Wednesday after U.S. government data showed a large, unexpected jump in weekly inventories.

The U.S. Energy Information Administration (EIA) reported a stockpile rise of 6.8 million barrels for the week ended Aug. 10, confounding estimates for a 2.5 million-barrel drop. The jump was associated with a sharp rise in crude imports and a fall in exports. The world’s largest economy imported 1 million barrels per day, data showed.

U.S. West Texas Intermediate (WTI) futures reached a session low of $64.51 a barrel, which would have marked the lowest settlement on the New York Mercantile Exchange since April. At last check, WTI was down $2.08, or 3.1%, to trade at $64.96 a barrel. ICE’s Brent contract declined $1.70, or 2.4%, to $70.76 a barrel.

Cryptocurrencies Rebound

Digital assets recovered tens of billions in lost market cap Wednesday, with bitcoin and Ethereum emerging as the biggest gainers. Bargain hunters scooped up ether at 14-month lows after following a 35% rout over seven days. At press time, the ether price had gained nearly 13% to $294.

After a successful defense of $6,000, bitcoin rose 6.5% to $6,495. The largest cryptocurrency by market cap controls just over 53% of the total market. That figure approached 55% on Tuesday.

The total cryptocurrency market was worth $209.5 billion Wednesday, up more than $20 billion from Tuesday’s low. Total trade volumes averaged around $14 billion.

Despite the gain, analysts have warned that the price outlook for cryptos remains negative amid the recent cash-out of ICOs.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 548 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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