After Dow 15,000, what's next for stocks?
Stocks have pushed high enough that investors have to plan for a pullback in the not-too-distant future.
The short answer is, you can't say when a crash might begin. What is simply not clear is if there's a catalyst to blow the market apart.
You can make that argument using earnings from Walt Disney (DIS) as a proxy. Disney beat estimates nicely. What was most impressive was the revenue and profit gains for its parks and resorts business: up 14% for revenue and 73% for operating income. The stock was off slightly after hours, after closing at a record $66.07. Given the high price of a ticket to a Disney theme park, the parks business offers a decent look at consumer confidence.
At the same time, however, the market is a bit frothy. It's going to pull back, and probably fairly soon. How much depends on whether tensions in the Middle East expand dramatically and the depths of economic slowing in Europe, China and at home.
Here's where things stood at Tuesday's close. The Dow jumped 87 points to 15,056, a record close and the first above 15,000. The Standard & Poor's 500 Index ($INX) rose 8 points to 1,626, also a closing high. Its intraday high of 1,623.03 also was a record. The Nasdaq Composite Index ($COMPX) added 4 points to 3,397, its best close since Nov. 7, 2000's close of 3,415.79.
For the year, the Dow is up 14.9%, with the S&P 500 up 14% and the Nasdaq up 12.5%. The Nasdaq-100 Index ($NDX), which tracks most of the largest Nasdaq stocks, is up 11%. It's been held back by Apple's (AAPL) woes.
29 of the 30 Dow stocks are higher, led by Hewlett-Packard (HPQ), Disney and Boeing (BA). Some 355 S&P 500 stocks are higher on the year, led by Netflix (NFLX) and Best Buy (BBY)
The technicals suggest the market is getting frothy.
The gains from 2009 are huge. The Dow is up nearly 130% from its March 9, 2009 low. The S&P 500 is up 140%. The Nasdaq has added 183%, and the Dow Jones Transportation Average ($DJT) has soared nearly 200%.
Next, the Dow and S&P 500 are trading more than 10% above their 200-day moving averages. That's a good starting point when you hunt for frothiness. The Nasdaq is 9.5% above its 200-day moving average.
Third, the price-to-earnings ratios for the three indexes are high. As of Friday, according to Barron's, the Dow's trailing p/e ratio was 16, compared with 14.46 a year ago. The S&P 500 was sporting an 18.7 p/e ratio, up from 15.75 a year ago.
Lastly, the relative strength indexes are jumping. A reading above 70 for this widely watched measure of momentum suggests an index or stock is overbought. With Tuesday's close, the Dow's RSI index was at 72.45. The S&P's was at 78.37, and the Nasdaq's was at 77.47.
No, that doesn't mean Armageddon is at hand. The numbers are saying you should expect some selling to bring the market down, as some investors take profits. It's only natural. The common estimate on Wall Street is around 10% from current levels. That would take the Dow down to 13,500 and the S&P 500 to 1,440.
To get a crash, you need something to fall apart, like the auto business or housing. Both are fairly strong and recovering from the crash of 2007-2009.
At the same time, the April jobs report strongly disputes the notion that employment is seriously slumping. It's wasn't the 165,000 estimate for jobs created in April that should excite. It's the revision for March that boosted that month's gain from 88,000 to 133,000, and the February gain to 332,000.
Moreover, the market charts show the major averages are moving higher right along with their 50-day moving averages, a clear sign of investor confidence. While Europe is a mess -- and, maybe, China as well -- the domestic economy is currently among the world's most stable. It may not be great, but it is not Greece or Spain. More importantly, exports don't drive the domestic economy.
But you can't discuss the stock market without discussing the Federal Reserve and its giant bond-buying program (aka quantitative easing) that's keeping interest rates low. the 10-year Treasury yield was 1.783% on Tuesday, up from Monday's 1.771% and the 1.76% yield on December 31.
The Fed is not alone in fighting economic sluggishness with such a tool. That's what Japan is doing right now, and the Nikkei 225 Index ($JP:N225) is up 36.4% this year alone.
The British are also using a similar tool. So are the Europeans. Won't it cause inflation? It hasn't yet, and high unemployment in so many markets will keep inflation pressures at bay.
The Fed could cause havoc if it stopped its program on the proverbial dime and started to boost interest rates. For one thing, it would expose millions of bond investors to sharp and immediate losses. (Remember, bond prices fall as interest rates rise.) And, just as important, rising rates would pull investor money into the United States and cause real problems. Much of the housing bubble occurred because so much money poured into the United States.
So, the bottom line is this: the market's up; it's likely to pull back. The pullback will be uncomfortable, perhaps like 2011. Absent a Middle East war or an event that seizes up global credit markets, it won't be the worst thing that has ever happened. It may even create some opportunities.
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Nor is the Markets rising simply a matter of the Global FEDs just printing more fake money. We are seeing record buying on Margin, Again. A strong case can be made that some Global Feds are actually buying stocks along with bonds. It's never good long term to try and force folks into a specific asset class. That destroys the spirit and integrity of free markets. Eventually you create a major bubble that can't be fixed. This will be a case of the cure being as bad or worse than the original illness.However, at some point, the Global Feds would have used all their ammo. The resulting failure will be Epic. End Game.
Are you trying to tell me the stock market can't keep going up 1/2% every day forever. Ha! That's what they were saying about the housing market back in 2005 and look what hap...............
Oh, I see.
as the dollar keeps falling because of the fed printing, stocks will keep rising. the dollare won't flee into bonds or cd's. they can't keep up with that inflation. not sure there is enough gold to flee into. that also includes the huge amount of pension fund dollars that can't cut it by being in bonds.
A very nice thoughtful, balanced analysis by Charlie Blaine. Downturns are an integral part of the market and primarily impact the day traders and hi-freq. hyenas more than the true investors.
I disagree to some extent Charlie's comments on P/E ratios. Since they are based on earnings derived in a lousy market, as the Bears expound, then imagine what they would be in a good market.
Secondly, IMO, the depth of the dip will be closer to 5% than 10% simply because there are so many investors , particularly bond investors , who are poised to step in and take advantage of the dips.
There's nothing like a taste of success for bondholders to realize they are not participants in the profits of a company. The shift has started and will only increase. The big unknown is the catalyst that triggers this change in cycle. Traders are easily spooked, but in the long run it's just another dip.
"...you can't say when a crash might begin. What is simply not clear is if there's a catalyst to blow the market apart."
In other words, you can't answer the question posed and this article has no raison d'etre. So stop wasting our time on babble.
the moment 17 Isaiah gets fufilled and Damascus Syria is destroyed, this market will be
going straight to HELL where it belongs. Wall Street PIG bulls have NO REGARD for
all the poor and dying people in THIS world.............
WATCH SCRIPTURE COME TO PASS
and watch this market crash and burn.
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