Should the market's new highs scare you?

More record levels for the Dow and S&P 500 on Friday, but stocks are is showing signs of being overbought. Here's what to watch for.

By Charley Blaine May 10, 2013 7:50PM
Bull figurine on ascending line graph and list of share prices © Adam Gault, OJO Images, Getty ImagesThe good news: Stocks finished at new closing highs Friday. The bad news: Stocks closed a new closing highs.

This is not a joke. The stock market has definitely become frothy, at least in the short term, and a sell-off is building. It's a question of when. So, if you're in the market, it'll be best to think about when you want to sell to protect your gains.

At the same time, you have to think about how deep and how long the sell-off will be. If you think it will be a short pause, waiting it out may be a valid tactic. A big break may require some moves.

The Dow Jones Industrials ($INDU) and the Standard & Poor's 500 Index ($INX) not only finished the week at closing highs, but the closes for both index were intraday highs as well. The Dow ended up 36 points to 15,118. The S&P 500 finished at 1,634, up 7 points to 1,634.

The Nasdaq Composite Index ($COMPX) closed at 3,436.58, up 27 points. That was two one-hundredths of a point below 3,436,60, its intraday high and its highest close since Nov. 3, 2000.
But here's why bulls ended the day reasonably excited. A decent gain on a Friday is often bullish. It means investors want to own stocks over the weekend because they expect more gains ahead. Twenty-three of the 30 Dow stocks were higher, led by IBM (IBM), UnitedHeath Group (UNH) and Johnson & Johnson (JNJ).

So were 377 S&P 500 stocks and 85 stocks in the Nasdaq-100 Index ($NDX), which was up 20 points to 2,981, its best close since Nov. 15, 2000.

The Dow was up 1% for the week, with the S&P 500 up 1.2% and the Nasdaq up 1.7%. For the year, the Dow is up 15,4%, while the S&P 500 has gained 14.6% and the Nasdaq 13.8%. The major averages have not had a losing month since November.

Now to the bad news. The Dow, S&P 500 and Nasdaq ended the week trading 10% higher than their 200-day moving averages. Not signals of imminent pullback, but signals that things are frothy.

Their 14-day relative strength indexes are all above 78. The Nasdaq's was 85.77 on Friday. Those are a clear overbought signals, and some pullback is near. The RSIs topped 70 in late March 2012. A sell-off that trimmed nearly 10% from the S&P 500 began on April 3, 2012.

The week ahead includes a host of important economic reports, including retail sales on Monday, producer prices on Tuesday and consumer prices and housing starts on Thursday.

But the big noise you will hear all week is: When will the Federal Reserve start to stop buying bonds and letting interest rates rise?

This is both a joke and a worry. The joke is the Fed itself won't raise rates until next year at the earliest. But the worry is that bond traders will take the chatter seriously and start selling anyway.

There was pressure on bonds this past week as stocks moved up. The 10-year Treasury yield moved up to 1.9% on Friday from 1.752% a week earlier, as the market rally pulled money from bonds.

Why? Last week's jobs report suggested employment is holding up. Thursday's jobless claims report was even more bullish. Claims fell to the lowest levels since January 2008.

Moreover, the combination of tax increases and sequestration and an improving economy are trimming the projected federal deficit substantially. Figures from the Congressional Budget Office show that receipts are 16% higher in the first seven months of fiscal 2013 compared with a year ago.

The import: The CBO has projected an $845 billion deficit for the year. But that figure is now  "hopelessly outdated," Greg Valliere of the Potomac Research Group wrote clients this week. Look for a deficit closer to $700 billion. The deficit was $1.1 trillion in fiscal 2012.

Next week includes some very important earnings reports on Wednesday and Thursday.

Before Wednesday's open, Macy's (M) and farm-equipment maker Deere (DE) report. After the close comes Cisco Systems (CSCO). Macy's $47.23 close on Friday was an all-time high. The shares are up 21% this year.

Wal-Mart Stores (WMT) and Kohl's (KSS) report before Thursday's open. After the close brings reports from Aruba Networks (ARUN), Autodesk (ADSK) and Nordstrom (JWN). Wal-Mart hit a 52-week high on May 3; Nordstrom's Friday close was a 52-week high.

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91Comments
May 10, 2013 8:27PM
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No, the FED's 85 Billion a month pumping up of the stock market should however...

 

The moment the presses stop, BAIL...

May 10, 2013 8:31PM
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I read the other day in the financial news that Soros and Buffet were planning on selling much of their common stock.  Should I be concerned when these two staunch liberal supporters of Obama's financial and economic strategies start jumping ship?
May 11, 2013 8:33AM
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"Should the market's new highs scare you? "  Yes and no.  Market highs do not scare me IF they are based on solid, hard-core stability [e.g.low unemployment, slow, controled spending, measurable growth, slow inflation based only upon costs of producing goods, etc.].  Market highs do scare me IF they are based on:  government interference, of any kind,  in the market,  on false numbers of any kind [e.g. manipulated unemployment numbers, manipulated rates of growth, etc.]  As such, I searched the "predictions" about the market reaching 16,000 in 2007 (right before the crash). Amazing!  So, yes "...  the market's new highs scare [me]?"
May 11, 2013 9:10AM
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News flash:  the stock market goes up and the stock market goes down.  Of course there will be a correction -- there always is.  But to time the market, you have to be right twice in a row.  When to get out and when to get back in.  If you can master this, more power to you.  You are a better investor than me.  The stock market is a long-term game.  If you play it like a casino, get prepared to get battered like a casino.
May 10, 2013 8:56PM
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The Japanese yen and the Euro getting weaker will soon make imports by the US cheaper than making products domestically, killing jobs once again
May 10, 2013 9:09PM
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If bond traders start selling, they're going to start buying equities.

4/17/13 MSN Bears were harping about commodities falling, Wall Street stalling, the Valkeries are calling investors to their doom. DJI 14618.

Today DJI is 15118, 500 points higher and it's frothy, is it?

Astute investors have learned to tell a good stock from a bad writer. Buy the one, dump the other. Take a profit, but there's no need to head for the panic bar just because you saw a bear in the street. As long as your corp. is still earning revenue and profits, paying dividends, increasing them occasionally, buying its own shares back on dips, there's no need at all to even think you'll need to dump and run. 

 

May 10, 2013 8:31PM
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Yes, you have no advanced notice of when the Fed abandons this madness. The rich will get theirs first and you MIGHT get part of the scraps. Inevitability hurts when you keep convincing yourself it won't happen. Inevitably... it will.

 

15 years ago there was $50-60 Trillion in currencies worldwide. There is more than $1 quadrillion out there now. That's a 99.5% inflation from validated currency-to-assets, to all this fake money. What are the odds that YOU will see anything in the compression?

May 11, 2013 5:23AM
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dont work hard but work smart. at 15000 + dow closed at all time high. would you buy equities? i would nt at this time . history proves when markets make new high  minimum 10% correction is out there. dow will correct to 13500 where smart investors will enter and retail investors who buy today will  see 10 to 20% valuation gone in a month and they will have to wait probably 2 years to get back to where they were at the beginning. whether its a stock or a index always book profits when it hits 52 week high or all time high and just wait for 10% correction . if this drill is done over a long period of time your profits can be tremendous.
May 11, 2013 2:42PM
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The top dogs in the banks are greedy but not stupid. If you will look back and what happened in Japan. The public were savers. The greedy bankers paid very low interest to their depositors. They then used the depositors money to buy up a lot of America. This made some of the insider bankers very rich, but they screwed their own people. All of this came to roost and the Japanese economy tanked. I believe the same thing is happening here. The top dogs in the banks and Corporate America paying themselves tons of money, while not paying the bank depositors practically anything, and dividends are not much better. Some of the banks are "too big to fail". The real threat is that the banks have too much influence in Washington through Lobbyists influencing greedy politicians. BREAK UP THE BANKS and reduce their influence in Washington.

 

Yes, the stock market is hitting all time highs, but the supposedly new wealth will not buy much because of the devaluation of our currency.

May 11, 2013 4:00PM
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Those that make light of the Global Fed Printing and it's potential effects should worry everyone. How anyone would think, just put the blinders on and invest blindly as the Global Feds print our way into currency destruction is a evidence of pure GREED! I can't tell you when or even how this will exactly play out. This type of Money Printing has never been done before on this scale and for this long. Keep in mind that the problems that this Money Printing is suppose to fix, aren't fixed. All this has done, allowed Big Banks to disregard what's on their Balance Sheets and create more bogus crap. Zero Accountability. Zero Fear of punishment. That's like giving a crack addict,  an all excess free key to the Crack House. Yet some folks want you to turn a blind eye and continue investing as if things are normal. Things are far from being Normal.

So it's not just the Market Highs that should have you concerned during a given run, it's how those Markets have gotten there. But if that doesn't matter to you put the blinders on, maybe you won't notice the massive crash when it comes. You can never make a profit if you never take profits.
May 10, 2013 10:06PM
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bill gross says the bond run is over. is this the top or bottom of the 9th inning?
May 11, 2013 8:04AM
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The market's doing fine, don't worry even if people like Buffett and Soros are dumping certain stocks like crazy...........their motto, suckers are born daily.
May 11, 2013 4:26PM
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KOO, the question whether you are on medication or just clueless.  You say Buffet is a right wing tight-azz conservative.  Pull your head out.  This guy believes in raising taxes on corporations and individuals.  You show me someone else who you would call a tight-azz conservative who supports buffet in this?  Well you can't, because conservatives do not support this and Buffet does.  Use logic if you are able and see that makes Buffet anything but a conservative.  Duh!

 

But then I am writing to a leftist and leftist live in fantasylands of "if I say it, it is true".  So you say Buffet is a conservative, therefore he is, because you said so.  WOW! 

May 11, 2013 4:21PM
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I think everyone has cut back on spending.   You can see that on trash day and by driving around.  

 

I don't see many new cars with paper plate.

 

No more big TV boxes in the trash pile.

 

If people are spending it's on home repair or their lawns.  

 

As for unemployment.  I went to the dirt yard the other day and everyone of their employees hit me up for some kind of job.  One wanted to install the dirt.  The guy that delivered the dirt at my home even handed me his handy man card. 

 

This market is only being pumped by uncle sam.  They are building even a large bubble then what hit last time.  A lot of these companies stocks are over valued by as much as 20%. 

 

When this market starts to crash and everyone heads for the hills at the same I just hope you folks are not to greedy and lose your pants to the large banks and uncle sam selling their shares first. 

May 11, 2013 11:28AM
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This is another one of those post that opaquely hints at predicting the top.

The author is maybe correct about a near term correction, but no ones knows how deep it will cut. For most investors, it would be wise to forget about taking any money off the table and just hang in there. If the market does correct, it might be a good time to buy. The "might" depends upon the circumstances of the correction. Do economic fundamentals still look good? Is the correction due to the market getting ahead of itself?

Very few people have the experience or often the intelligence to discern the direction of the market. Even those that do admit to correct calls being more luck than skill. This is why it pays to build a solid portfolio that you can hang in there during the manic-depressive gyrations of Mr Market. 

My own view is that we are in a very weak economic recovery not only here but globally. I believe it will takes several years perhaps a decade before the global economy is back to a semblance of normal. An awful lot of things some probably not so good can happen between here and then. 

We are entering the weak season for the market. A lot of enthusiasm has driven it up to an all-time high. If you study past "bull" market runs, they always correct along the way. Even though the numbers beg bull market, I'm not really convinced we are in one. 

For me it doesn't really matter. When it comes to the market, I don't call the shots; I just take advantage of whatever the situation is. That's the advantage of not being a trader. At the beginning of the years, I did a little selling. I got rid of what I considered a "weak" position, but I did put some of the proceeds back in. If we get a significant correction, I'll dump the rest back in.

Har har har mateys!
May 13, 2013 7:44AM
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They do. I am 15% cash and my finger is on the sell button at the first sign of big trouble. It's not if, it's when.
May 13, 2013 8:50AM
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Naw ..The higher it goes...

The faster and  farther it gonna fall...Its just a matter of time...

Beware folks..

May 11, 2013 11:51AM
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Jerry Mac....Do you "only follow" Markets and Companies for 1 Quarter or 60-90 days...?

 

I'm pretty sure "revenues" have been up, until this last quarter ?

Earnings on many are hitting close or better to consensus, but guidance is weak on some..

Weakness in Europe and China pulling back to the Homeland, have played a big part.

Foreigners are investing in our Markets for safe haven, and buying up some of our real estate.

Do you wonder or consider, WHY that is...??

Just sayin'...

May 12, 2013 12:40AM
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"A global 2012 poll reports that 59% of the world's population is religious, 23% are not religious, and 13% are atheists."

 

What are the other 5%?

 

May 10, 2013 11:12PM
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The interest rate are too low to make any money ,so the people are pumping their money in the stocks dividends. It could have a small correction soon, but the stocks will go back higher and higher until it hit around the same number as the gold prices are. Then the dollar gets stronger and stronger and precious  metals get lower and lower until one day the big switch happens. Everyone lose there stocks, the precious metal that they sold because it was too low and the fed's banks make all the money when everyone else is broke. Fed's Banks Win.
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