March 5, 2013
The Dow finally closed at a record 14,253.77. Both the Dow and the Transports are at new highs, so there is a Dow Theory confirmation of a new bull market in stocks.
The stock market has been very interesting the last year or so. Despite numerous problems in the economy – the federal debt, Europe’s problems, the fiscal cliff, sequestration, Europe, QE3, etc., the market did not want to go down. There was every reason for the market to go down, and it did not. There is a famous saying on Wall Street: Bull markets climb a wall of worry. And this bull market has certainly done that!
That said, it’s a cautious green light now for stocks now. Why cautious? Since the March 2009 bottom the stock market has risen over 7,500 points. That’s a huge move. Can it move higher? Of course. But after such a big move, the risk increases of a large move downwards, often when you least expect it. And now that the financial headlines will be trumpeting the stock market’s climb back to glory, it is best to be somewhat prudent with new stock positions.
Another reason for caution is that many stock markets around the world are not making highs along with the U.S. stock market. As global markets are very intertwined, this is cautionary.
And finally, there is evidence that the new highs in the Dow Industrials and Transports may be more of a result of the Fed’s all-out policy of flooding the system with liquidity and pressuring interest rates to absurd lows. Many economic indicators are less than stellar – new job creation, the federal debt, sequestration, etc. than the fantastic business climate that new highs implies. But as the stock market is a discounting mechanism, maybe it is looking forward to most of the problems being resolved without major pain for businesses and consumers. Time will tell……..
That said, if you do not own any stock, this is the time to start and get your feet a little wet. All but the most conservative investors should own some stock now. And as long as the trend remains bullish, plan on adding to that position on market sell-offs.
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