Market Achieves Record Levels

About an hour into trading today, the S&P 500 and the Dow Jones Industrial Average have both surpassed previous all time highs and achieved significant milestones. As I write this around 10:30am, the DJIA is at 15,003, marking the first time in history the venerable index has reached that level. Similarly, the S&P 500 is at 1,616, the first time that index has ever been over 1,600. And the Dow Jones Transportation Average is only 7 points below its high. Should the DJTA move to record levels concurrent with the DJIA then we’ll have a bullish confirmation according to Dow Theory. This is all great news.

Yet surprisingly, given these lofty levels, the overall enthusiasm seems relatively muted. There are no fireworks, no parties on the floor of the stock exchange and relatively muted commentary on CNBC. I think that’s a good thing. It suggests that this in not a period of “irrational exuberance”, like 1999. Corporate balance sheets and earnings are in much better shape than in 1999 or 2008 and the global economy continues to be propped up by central bankers. So as long as the money continues to flow unabated, the good times should continue.

That being said, it appears to me that market sentiment remains relatively bearish, or at best very overly cautious, despite the record levels. I think too many individual investors have remained on the sidelines since the crash in ’08, missing out on this stupendous rally. Also, the plethora of contradictory economic news, both in the US and around the world, has left market participants confused and scared. It seems as though every day one economic statistic reveals a slowing economy while another suggests that everything is more robust than expected. Earlier this week the PMI data indicated that the manufacturing sector was slowing. Comments by the Federal Reserve seemed to confirm that thesis. Yet today it’s all wine and roses after the BLS released a stronger than expected employment report. More jobs were added than expected in April, and February and March were revised higher. Additionally the unemployment rate dropped to 7.5%, the lowest level since the crisis began.

It’s possible that since the DJIA and S&P have now breached important psychological barriers that the rally will really take hold as cash begins to move from the sidelines and investors and money managers who have under-performed the market rush to add equity positions. If that is the case, the broad market could move markedly higher from here, dispelling the old adage to “sell in May and go away”.

Conversely, these lofty levels could spur some investors to take some profits and wait for the inevitable correction. We’ve already had a great year after only four months. I certainly would have signed up for a 12% return for the year. If this momentum continues, we could be looking at 20%+ returns for the year. Only time will tell as there is still a long way to go before the story of the market for the year is fully written. Personally, my clients and  I remain almost fully invested, but we’re selling weaker holdings into the rally to raise some cash for the next buying opportunity.

The Bull Is Running: So Says Dow Theory

Three and a half weeks into 2013 the Bull is solidly in control of the market. The Dow Jones Industrial Average and S&P 500 are both closing in on the all time highs set back in 2007. The Nasdaq has surpassed the 2007 levels but remains well below the all time high from 2000. Interestingly, the Dow Jones Transportation Average has just blown past its previous record to achieve a new all time high. All of this has occurred in the face of continued economic uncertainty, record high federal debt levels and an upcoming legislative battle over the debt ceiling and the deficit.

In addition to writing this blog, I also pen a free monthly newsletter called “News and Views”. (Simply drop me a note and I’ll add you to the distribution list). Part of my monthly content includes analyzing a bunch of charts for clues on the direction of the market. This very basic technical analysis includes a discussion of Dow Theory, first proposed by Robert Rhea and George Schaeffer, based on the work of Charles Dow. At its core, the theory describes big, medium and small trends in the market. In order for the trends to be validated, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) must be setting concurrent highs or lows.

So, according to Dow Theory, where are we right now? The easy answer is that the market is decidedly bullish. The DJIA and DJTA are both at multi-year, or all-time highs right now, having moved higher every day this week. This suggests that, in the near term at least, there should be further gains ahead. The bullish trend will remain in force until both averages move lower and fall through support to interim lows.

There are other indicators, like NYSE Bullish Percent Index and the Volatility Index (VIX), that suggest that the market may be a little ahead of itself and in danger of a correction. Even if that happens, it wouldn’t necessarily mean the end of the bullish trend. Dow Theory says that the primary trend of the market remains in force until it isn’t. So we’ll just have to keep watching for clues as to the health market. For now, the bull is running.