On Demand

Sorry, But I Just Don’t Get It

by

The DOW topped 14,000 today and the S&P 500 slipped past 2010. Crossing these milestones means a lot for positive market perception, and that should mean plenty for market players. Equally important, the news of the crossings will mean plenty for consumers already buoyed by the market numbers in January.

  • The Thomson Reuters/University of Michigan's final reading on the overall index of consumer sentiment rose to 73.8 from 72.9 in December, topping economists' forecasts for 71.5.

True, other good economic data, and a general perception that things are getting better, helped with consumer sentiment in January, but one should not downplay the effect of a market getting close to its all-time high of 2007. Year-end statements for 401Ks and other retirement plans looked pretty at the end of 2012, for sure.

Along with the milestones of the big two, the S&P 400 held above 1,000 in January. The S&P 400 is an index of strong mid-cap companies, the go-to stocks investors move to after the large caps and other "pretty" stocks reach saturation. Today, it crossed 1,100, which is its highest level of all time. Consider this index a strong floor for the overall market.

As well, consider the VIX reached a scary high of 89.53 in the fall of 2008. It hit a high of 57.36 in early 2009. In 2010, at the height of the European crisis, it peaked at 48.20, and in the summer of 2011, when the market tanked as the US lost its coveted perfect credit rating in the debt ceiling standoff, the VIX topped out at 42.89. Last year, the VIX met resistance at 26 and change. Today, the VIX is ranging between 12 and 13

My point here is the market has seen steady growth over the last few years. The confidence rightfully lost in 2008 and 2009 is now beginning to restore, as seen recently with the large inflows of money into the market from retail investors. Now, combine this with the US economy showing steady but moderate growth the last few years, the forward movement of the emerging economies (think China), and the potential for Europe to turn positive in 2013, the reasonable conclusion is that this bull run is real, very real and that it will continue for some time (all things being equal).

Given the above, I find it hard to swallow the prediction from a bright mind in the investment world ...

  • Even the most optimistic investors are getting a bit antsy these days, wondering how and when it's all going to end. For Tom Kee, president & CEO of Stock Traders Daily, the answer to that question is 'not well.' "I'm looking for another high in this market, then I am looking for a turn down," Kee says, adding that he believes it is "going to come relatively soon." By downturn, however, what Kee means is a crash to the tune of ''50 to 60%," which would bring the Dow Jones under 6,000.

Okay, in 2008 and 2009, when the global financial structure almost collapsed, the US and other major economies went into major recession, and market confidence around the world fell to historic lows, the DOW fell to 6600, give or take. Now comparing the two scenarios, then and now, how does one conclude we will soon see another market collapse? Here is his reasoning.

  • Kee says he came to this dire conclusion using a number of technical and fundamental analytical tools, including an earnings per share growth rate for the Dow that he calculates at 1.18%. It's a sluggish pace that he says "just isn't enough to justify the growth in the Dow's actual price."

Wow! I find this hard to grasp. A sluggish EPS for the Dow will collapse the market? I will grant the market will go down if overall EPS goes down, but a market collapse? Frankly, I just don't get it.

Here are two pieces of economic data that further suggest a market collapse is not coming soon.

  • The PMI registered 53.1 percent in January, an increase of 2.9 percentage points from December's seasonally adjusted reading of 50.2 percent, indicating expansion in manufacturing for the second consecutive month. The New Orders Index registered 53.3 percent, an increase of 3.6 percent over December's seasonally adjusted reading of 49.7 percent, indicating growth in new orders and the overall economy grew for the 44th consecutive month.
  • Chrysler Group LLC said January car sales of 117,731 were the best since 2008 and projected industry sales during the month grew at an annual rate of 15.5 million. Total Chrysler sales rose 16 percent from 101,149 a year ago.

The Dow dropping to 6,000 soon? Sorry, but I just don't get it ...

Trade in the day; Invest in your life ...

Trader Ed

Ask Ed a Question

0 Comments

Join In on this conversation, post a comment below.
No comments yet... Be the first to comment.

About the Author

Hello, I am Trader Ed.  No, not Mister Ed, although at times I feel a bit like a talking horse.  You see, my job is to educate folks about the market, which means talking about (or writing in this case) anything and everything that affects the market.  This means the world is my oyster.  Every day, I read for about an hour or so about the happenings in the world.  Every day, I look for leading indicators that will help me “see the future.”  No, I am not an oracle, nor do I pretend to be, but I do look for macro trends that point in a direction, and I am more than happy to share my “vision” with you.  Keep in mind, though, my vision derives from analyzing the fundamentals of the global economy, as well as looking at current movement in the market.  I shun the doomsayers and I embrace the realists.  I look to the positive without denying the negative.  In short, I paint as realistic a picture of the market as I can.  So, if you have a question in this realm, feel free to ask me.  I will answer you in this column and I will do that to the best of my ability.

Hoping to hear from you.

Ask Ed a Question

Membership is Free. Join Now in less than 5 seconds! Alternatively Join or Sign In here.