What Brexit? The Dow Could Rally to 18,000

Stocks rebounded the past two days, and the Dow could rally to 18,000.
By Ellen Chang ,

The Dow could rally to 18,000 as the stock market has rebounded the past two days in the aftermath of the British referendum to leave the European Union, putting downward pressure on all investments globally.

While the VIX, the volatility index, rose after the vote ended, it has dipped back down this week, demonstrating that the market will continue to spike upwards, said Patrick Morris, CEO of New York-based HAGIN Investment Management.

"The market will rally and will likely land at 18,000, where it will sit until the U.K. prime minister elections," he said. "The Dow will get to 19,000 before it gets to 16,000. You can't sit on the sidelines forever."

Investors who are sitting on the sidelines and are fearful that the market will nosedive again are missing out on opportunities of staying invested in the market.

"People are being too emotional and reactive, because we are not looking at an immediate exit for Britain," Morris said. "The bond market did not react like the stock market, because they did not believe the underlying quality of the banks had depreciated in any significant way."

Unless Scotland or Ireland decides to vote to leave the EU or another major news event occurs, the market will continue its upward trend, he said.

"The market has been willing to rally the past two days without any major news," Morris said. "I don't see that the market has anywhere but up to go."

The Dow could easily revisit 18,000 in the next few weeks, returning to a level similar that has been experienced since late 2014, said Edison Byzyka, chief investment officer of Hefty Wealth Partners in Auburn, Ind.

"The 18,000 could easily be viewed as a strong resistance to the upside and it will take significant catalysts to meaningfully break above it," he said.

The 18,000 level is attainable because the flow from institutional block purchase orders which are orders with at least 10,000 shares is up by almost 10%, Byzyka said.

"This is significant, because it looks at the proverbial smart money and how they're investing," he said. "Historically, smart money has been purchasing equities at levels foreseen as cheap, which may be where we're at today given the volatility we have experienced."

Stocks are likely to test the lows that the market reached in January when the Dow fell below 16,000 and oil plummeted to below $30 a barrel, Byzyka said.

"I do envision equities to revisit the January lows in the third quarter or even lower, before allowing for breadth to pick up for a longer secular growth period," he said.

Investors will focus on the current earnings season, which started a few days ago, and scrutinize the results from banks, energy, technology and consumer based companies instead, said Yale Bock, a portfolio manager at Covestor, the online investing company, and president of Y H & C Investments in Las Vegas.

"Regarding how the market performs, it seems participants are at the mercy of a roller coaster with a confused ride supervisor who is not sure from one second to the next as to which direction its riders would prefer," he said.

The Dow could get close to 18,000 and reach 17,800 or 17,900 before the market pulls back and could reach a low of 17,200, said Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF (TUTT).

"We don't see the possibility of new highs until after the U.S. presidential election," he said. "Since markets don't go straight up off a correction, we can retrace a big chunk of it and then traders will retest some near term lows, probably into Tuesday's range."

The odds of an upside rush of returning back to recent highs are very good, said C.J. Brott, founder of Capital Ideas, a registered investment adviser in Dallas.

But Careful: The Dow Could Eventually Plummet

The current upswing in the market is merely a relief rally within a 10% to 15% correction, said Chuck Self, CIO of iSectors, an ETF strategist in Appleton, Wis.

When the S&P 500 declined by 5.5% on Friday and Monday, the 10-Year Treasury yields dropped by 28 basis points. When the stocks bounced back the past two days, the 10-Year Treasury yield rose by only one basis point, he said.

"Obviously, the Brexit aftermath sent Treasury yields to levels that reflect the slowing economic growth picture we foresee in the second quarter and half," Self said. "The slowing economy and global uncertainties will reduce revenue and earnings expectations and we expect the S&P 500 to move below 1,900 and continue to trade in a 1,800 to 2,100 range in the coming months."

The current market valuations are not warranted and a bear market will occur when the confidence in the central banks to "pull a rabbit out of the hat goes away," said Ken Moraif, a certified financial planner for Money Matters, a Plano, Texas-based financial planning firm. "The market seems intent on going up purely on the back of confidence in the central banks ability to solve any problem that presents itself. When that bear market comes, we see the Dow dropping to 11,500." 

Even a vote for a smaller country seeking to leave the EU and abandon the euro would "wreak havoc on world financial markets," said Don Shelly, a professor of practice in finance at the Cox School of Business at Southern Methodist University in Dallas.

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