Dow Hits 13,000: Is The Cat Out Of The Bag?
With many people expecting a pullback – the market jumps a wall of worry.
Finally, there is more recognition that the economy is getting better based on stock market trends. We made the prediction a few weeks ago that the Dow Jones would reach 13,000 because investors were seeing a turnaround in the U.S. economy (See January 23, 2012.) This forecast was fought by several people who argued the economy was still in shambles and well-known economists stating a recession was on the way. The stock market has rallied because economic fundamentals have improved and earnings are in much better shape than a few quarters ago. Stocks are still at relatively low P/E ratios at about 12/13 percent on average and are a better bargain than bonds which are yielding almost zero returns.
Is The Cat Out Of The Bag?
Is the rally almost over? No. Some analysts were quick to point out that Dow 13,000 doesn’t mean anything. They are wrong again. These are the same people who didn’t predict Dow 13,000 and lack reasonable explanations as to why investors are clamoring for stocks. The Dow passing a round number is headline worthy and will get more people interested in how their 401K is doing. Couple this with further information via data points about the economy improving and this could be the second leg of the upward momentum – not the last wave. Some investors sold out of the market early and won’t make most of the returns they could have if they don’t find new entry points while others were too concerned with U.S. tax policy and PIIGS to see the positive momentum. They are also fighting the Fed that has made it clear interest rates will be low for some time to come and this strategy tends not to payoff in the medium/long run. We are re-calibrating and looking for new resistance and support levels but we will wait for new economic data to come in. The cat isn’t out of the bag when many people still don’t believe in the current rally even though momentum is getting stronger. This view could change quickly if pressures from the Middle East increase oil prices and decrease real disposable income. which would negatively impact U.S. demand and consumer spending if payroll gains don’t rise further.