The Dow Jones Industrial Average has now risen for nine consecutive days and is now at a record high close of 14,455.28. We have not confirmed the exact period but this appears to be the longest winning streak in the number of days going all the way back to 1996. That is great news for the bulls, but based on our story’s title you might guess that we at 24/7 Wall St. are starting to take at least some caution here.
For starters, we are not expecting a crash. The available data just does not support a crash. So if one comes, it is what technicians would call a one-off or something that the financial markets could not have known about.
We still think that the DJIA will surpass our peak DJIA target of 14,590 this year. The reason we are starting to question the oomph of the rally is based upon several issues.
First is that today’s gain to a record close was on a gain of only 5.22 points. Yesterday’s gain was only 2.77 points. When you compare these to levels around 14,500 they are statistically irrelevant, and the gain on Tuesday was literally not know to be a gain until several after the closing bell was rung.
The second concern is that the winning streak was broken elsewhere by the broader and more important S&P 500 Index. The S&P is 500 stocks and is market cap weighted. The DJIA is only 30 stocks and it is a silly old-fashioned price-weighted stock index. The gain on the S&P 500 was 2.04 to 1,554.52 today, but Tuesday’s drop was -3.72 to 1,552.48. Today’s gain was too small to even get us back above Monday’s close of 1,556.22. So the DJIA is at new highs but the S&P is lingering.
Another concern is that he DJIA combined gains of the last two days are less than 10 points combined. Again, that is statistically irrelevant. If you go back to the close on that close of 14,054.49 versus the 14,455.28 on Wednesday makes for a gain of 2.85%. That is what investors would call a slow grind higher. Remember, we are at new highs and we are not at a level that is bouncing off of new lows. The prior average gain before the last two trading days was a gain of 0.4%. That means that the gain on average was about 55 points per day, but now we have two days of gains in a row with not even 4 points a day. Again, we are talking about an index close to 14,500.
Another issue we have to be concerned about is that we have not yet lifted our own DJIA target of 14,590 as the peak target of 2013. We will update that target, but not until at least some dust settles. right now the analysts are chasing target prices higher. There is an obvious reason in that the fiscal cliff is now mostly (cough) avoided and the impact of the spending sequestration is likely to be far less in reality than when you were being scared silly over it each and every day. Still, we need at least one day of rational profit taking before we adjust our target any higher.
Short sellers are also increasing their bets on the key go-to quality dividend stocks.
Another issue to consider is the roulette wheel and the coin toss lessons. This is the “least” worthy of any concern but it brings into consideration the laws of probability. If you toss a coin one time you have an equal chance of getting heads (an up market day) or tails (a down market day). Now go get 100 people in a room and start eliminating the ones who toss a coin and do not get a heads result after the ninth coin toss. There may be no one standing in the room. The same is true for roulette, except that it is black (an up day) or red (a down day). It happens that a roulette wheel can land on the same color nine times in a row. It is just very odd.
The bullishness of the financial media and the media in general is a concern to us, even if technically we are in the financial media. The issues around the markets right now are just more positive than negative. When the media, or the retail investor climate, gets too bullish then you know much of the smart money has been made. Remember Warren Buffett’s adage: “Be fearful when others are acting greedy, and be greedy when others are fearful.”
Here is our takeaway. Do not go panic. Even if the market corrects, a 5% correction would not be absurd. The market’s latest winning streak has stocks up 2.85% for the 9 day period. Now if you go look at the year 2013, the gains year to date are now 10.3%. That is a 10.3% rally in a mere two and a half months. What we want to tell you is that with the VIX under 12 it is cheaper than ever to go buy protection via put options. The so-called “Fear Index” should now be called the “Complacency Index.”
Is there a caveat? Not really, but that only is because there are many caveats.
The Dow Jones Transportation Average hit yet a new closing high today with a whopping 1.6% gain to 6,232.59. A rising Dow Jones Transport Average is confirmation of what is called Dow Theory. That means that the gains can still continue.
Stocks remain as a whole not very expensive and bonds remain historically very expensive. The S&P is roughly at 15-times earnings. Even a 5-year Treasury note does not yield 1%. The 10-year Treasury barely yields 2% and the 30-year Treasury has risen but still yields only about 3.2%. Stocks remain relatively cheap, particularly when you consider that you can buy blue chip and former blue chip stocks which yield 3%, 4%, and even 5%.
The last caveat is that the market may make us look really stupid. We could easily have more gains, including a blow off top. Remember, a cynical view of the market is that the market seeks to cause the most pain and to make the most number of people wrong that it can.
Anyhow, hopefully you get the point. Our take is that this rally is getting long in tooth. The good news is that we are not expecting a crash. The flip side is that we are not lifting our peak DJIA target of 14,590 yet either and that is only 1% above the close on Wednesday. We will lift that target, but we have to see some normalization first.
You might want to go back and see how we came to that 14,590 DJIA peak target for 2013 in the first place. After all, we have gotten within about 1% for each of the last three years under the same methodology.