Will the Dow top 17,000?

While several issues loom over the broader markets, we could see a push past the landmark figure before reality sets in.

By InvestorPlace Jul 2, 2014 10:01AM

Caption: Traders work on the floor of the New York Stock Exchange
Credit: © Spencer Platt/Getty ImagesBy Anthony Mirhaydari

Stocks surged higher on Tuesday -- a day of the week that has shown a penchant for strength lately, dubbed "Turbo Tuesday" by traders -- pushing the Dow Jones Industrial Average ($INDU) within a hair of the 17,000 level for the third time since early June.

The other major averages were on the move too, with the Russell 2000 ($TOMX) small-cap index returning to its early March high, and the Nasdaq Composite Index ($COMPX) in free air.

The catalyst, aside from simple upside momentum, wasn't clear. The rest of the market was quiet. The dollar was unchanged. Commodities unchanged. Treasury bonds didn't move.

Macroeconomic data was mixed to weak, with construction spending disappointing. And the geopolitical situation is a hot mess as with the Iraqi parliament essentially quitting, Ukraine ending a ceasefire against separatist fighters, Japan flexing its muscles, and Israel on the attack.

None of this seemed to matter. Will the upside move in the Dow Jones and other major indices continue?

Much depends on Thursday's payroll number and the upcoming Q2 earnings season. If the jobs report is strong, it could force a reevaluation of when the Federal Reserve will start hiking interest rates. Capital Economics was out with a note to clients Tuesday warning that the recent rise in inflationary pressures suggests the first hike could come as soon as March.

As for earnings, Alcoa (AA) will kick things off next Tuesday when it reports after the bell.

For their part, CEOs are far from optimistic. The Bloomberg CEO Sentiment Index, shown above, has been flat lining all year. Companies that have reported early are sounding a cautionary note highlighting rising cost pressures, slow household income growth, and the fragility of the recovery.

bloomberg ceo sentiment index

According to FactSet, expectations are very high: The combined Standard & Poor's 500 Index ($INX) earnings growth rate expectation for the first half of the year is 3.7 percent -- which is expected to increase to 9.9 percent for the second half of the year. Breaking down the expectations by sector, analysts are looking for financials to carry the burden, with earnings growth of 15.5 percent for the second half versus a -2.7 percent decline in the first.

mortgage loan applications

The problem is that the banks have been pressured by the relative market calm we've seen lately. Long-term interest rates have drifted lower, with the 10-year Treasury yield dropping from 2.8 percent at the start of the second quarter to just 2.5 percent now. That hits bank profit margins. Moreover, the drop in market volatility and bond market volume will weigh on trading and brokerage revenue. And mortgage activity, despite the recent drop in borrowing costs, remains moribund.

Banks have been tapping loan loss reserves as a way to manage earnings in this environment, but that's a finite piggy bank that can't bolster results forever. Just look at JPMorgan (JPM) as an example. The bank has pulled down its loan loss reserve from nearly $26 billion in early 2012 to less than $16 billion now.

So there are hurdles ahead, even if Russia doesn't move into Eastern Ukraine or Iraqi oilfields aren't set ablaze.

What, then, explains what happened in the market on Tuesday?

It was all about liquidity. Although the Federal Reserve has started pulling back on its QE3 bond purchase program, there are still days when it's actively and aggressively buying up bonds. Tuesday was one such day, with upwards of $3.25 billion being pumped into the financial markets. There are only two other days like this in July.

fixed-rate reverse repo amount

Also, the big banks pumped about $189 billion into the financial system Tuesday as end-of-quarter window dressing was removed. This involves banks selling riskier assets, using the cash to borrow ultra-safe Treasury bonds from the Fed, putting them on their balance sheets to boost capital ratios for regulators and investors, and then reversing the trade when the new quarter starts.

This behavior has been growing more and more noticeable as more and more banks are apparently getting in on the action.

And finally, as the most heavily weighted stock in the Dow, a 2.8 percent surge by IBM (IBM) on no major developments boosted the overall trade despite relatively narrow participation in Tuesday's rally.

Add all this up, mix it in a bowl, and draw your own conclusion.

Bottom line

My guess is that we see a short-lived push over the 17,000 level for the Dow Jones -- to great fanfare and excitement -- before the issues above get traction and encourage some profit taking in extended areas like semiconductors.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

Jul 2, 2014 10:28AM
This is really the only thing that which matters as Corporations are by FAR the biggest Jet Fuel Engine to the Markets thanks to unlimited Crack Dollars by the Global FEDS. All this Talk of geopolitical unrest is basically a non issue. Everything will revolve around mounting Global Debt and the Shoes that will eventually DROP because of that Massive Debt. Unless you are continually locking in Profits, DOW 17,000 is meaningless.

"Monsanto Raises $4.5 Billion in Its Biggest Bond Offering ...
Bloomberg L.P.
6 days ago - Monsanto Co., the world's largest seed company, sold $4.5 billion of notes in its biggest bond sale ever to help fund share repurchases."

Jul 2, 2014 10:18AM

there is a steady influx of new cash via everyone's payroll every week or two.  that along with the FEDs QE insures a steady fuel for the engine.  so it all goes up. 


we're seeing a serious number of new homes and apartments in my area.  a couple thousand new units opening up in a 1 or 2 square mile area.  seems the local area is booming. 

Jul 2, 2014 12:42PM

Barry you got to give up on that drum...

Well lunch and brunch is over...

Time for chores, burn papers take garbage to the manure pile..

Grocery shopping under way, you know 5% discount on Senior's day..

Trim trees haul brush...

And Garden work.....Then a nap.

Ciao for niao...

Jul 2, 2014 11:08AM
It will not be a surprise at all if we learn one day in the not too distant future that the US Guberment is the number one owner of stocks.  Common sense says it is in the whatever administration is currently in power to placate the more vocal rich to keep them calm and unaware so as the continue on with the New World Order right under their noses.  And who would be surprised to learn the corrupt politicos would use the citizens money to trick them?  Remember the end result of this game will leave many many millions of Americans very much worse off in the future while our wealth will have been transferred to foreign nations.  The end result I believe will one day be to sell off the market and create a collapse to form a more a level socialistic field.  Anyone thinking this present Administration has ended it's war on the rich is way way too naive.  I would never for one second put this past these cats.  I know it is hard to envision something like this but one should always always be prepared to think outside the stated or obvious box, usually the opposite of what is being implied is their real intent.  JMHO
Jul 2, 2014 11:22AM

No doubt, that Markets and/or some equities may be overbought...

Foreign money influx, has helped bolster Markets...

Margin buying in the Markets is at some all time highs...

QE although dwindling, still props the Economy to some degree...It's ending.

Old investors have been slowly coming back to the Markets at the "wrong time"...late.

Company buybacks of stock, are mellowing...Some dividends are still increasing...Slowing down.

We can pretty much build a set of Charts to show anything in History...Good or Bad.

Recovery of Housing and Jobs has slowly crept upwards, indicating still in recovery mode..

The "lagging indicators"

The Recovery and some would say the Recession is very long in the tooth..

Although "officially" the Recession has been over; And we might be due for a "new one".?

Congress (particularly the House) along with a non-action Administration and Senate, has stymied a better recovery for Americans...A bitter Partisan Roadblock that is providing NOTHING..!!

The Administration needs to take action on it's own.

And Americans, along with Capitalist, need to start BELIEVING in America, because for damn sure the Government is not going to be the answer to all our woes...It Can't be.


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