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The Dow's New High: Bull's Last Gasp?
Blue chips have finally joined the rest of the market in record territory, but don't get complacent.
With the Dow Jones Industrial Average setting a record close Tuesday to join many other indexes on new high ground, many analysts see confirmation of a new bull market. Conventional wisdom seems to be that the Standard & Poor's 500 is in a secular, or long-term, bull market now that it has moved above resistance from previous bull-market peaks in 2000 and 2007.
Not so fast.
Calls for the start of a new bull run are a bit misleading because the bull has been running since 2009. Based on several factors, the Dow's breakout may be the manifestation of the last bears giving up and buying. The market may be finally out of fuel—demand—making it vulnerable.
With "everyone" bullish, there is nobody left to buy. Indeed, Carl Swenlin, proprietor of the analysis site DecisionPoint.com, notes that the ratio of assets in bullish Rydex mutual funds to assets in bearish funds and money markets suggests just that. Brendan Conway Tuesday reported that stock mutual-fund inflows were on track to hit levels not seen since 2000. (See Focus on Funds.)
We can argue over the details, but sentiment surveys such as that from the American Association of Individual Investors show levels of enthusiasm not seen for quite some time. While sentiment experts will argue bullishness is not high enough to be of concern, my fear is the number of articles I read espousing just that.
It is no secret that technical indicators are not what they used to be, and we have to now account for social media buzz in determining exactly what "too bullish" really means. It is subjective, but right now in the group of respected traders and money managers I follow on Twitter, few if any are warning about a possible market correction.
Changes in the analysis climate also demand we step back to look at the big picture, away from the fog of the day-to-day news-driven gyrations. Let's start with the S&P 500.
A long-term chart shows the 2000 and 2007 peaks at roughly the same level—1550, in round numbers (see Chart 1). When the index moved above that level in March of this year, it appeared that it had broken out and the secular, or long-term bear market of the past decade was over. And with the index trading at 1769 Wednesday afternoon, there is no doubt that long-term resistance was shattered. It was not just an overshoot based on small market wiggles.
Chart 1
Standard & Poor's 500
But is the S&P 500 the best representative of the market? Even though it contains the lion's share of market value, there are other ways to look at stock-market performance. For example, in my opinion, the Nasdaq scored an important upside breakout 21 months ago in January 2012 (see Chart 2).
Chart 2