All-Time Highs

3/11/2013


The Dow Jones Industrial Average recently moved to its highest level ever, surpassing its previous closing high of 14,164.53 set October 9, 2007.

Equally important, from a Dow Theory perspective, is the series of new all-time highs posted by the Dow Jones Transportation Average. New highs in both the Dow Industrials and Transports reconfirm the market's bullish primary trend, according to the Dow Theory.

Another positive factor to note is the broad-based nature of the rise, with all-time highs seen not only in Dow stocks, but also in both small-caps (such as the Russell 2000 Index) and midcaps (such as the S&P MidCap 400 Index).

Perhaps most interesting is the sentiment on and off Wall Street, not exactly the type of ebullience seen during previous record moves.

Indeed, investors remain skeptical about this rally based on a litany of issues many view as bearish for stocks — continued gridlock in Washington, fears about sequestration, higher taxes, and economic and political upheaval in parts of the world. The skeptics credit the rally to the Fed's "easy money" policies.

However, investors who think today's market reflects today's events fail to understand the forward-looking nature of the stock market. Strength in the averages, especially the ultra-economically sensitive Dow Transports, looks like a harbinger of better economic times ahead.

And while the Fed's willingness to keep interest rates low has helped risk assets such as stocks, ascribing all of the market's advance to Fed financial engineering ignores record corporate profits posted in recent years. This growth in corporate profits since 2007 has given the market a more attractive value profile.

For example, when stocks topped out in October 2007, the S&P 500 Index traded for about 16 times expected year-ahead earnings, versus less than 14 today.

The one major index still below its all-time high is the S&P 500. While the S&P 500 does not play a role in Dow Theory analysis, many institutional investors use it as a benchmark. Thus, a move to all-time highs in the S&P 500 would further confirm the breadth of this rally

To be sure, it is not unusual for the stock market to pull back following a move above important milestones. It takes a certain amount of buying energy to eclipse previous levels, and markets frequently require a breather after reaching new highs.

However, with the Dow Theory firmly in the bullish camp, investors should regard pullbacks as corrections during a bull market and take the opportunity to buy quality stocks. The Forecasts continues to feel comfortable holding roughly 92% to 98% of portfolios in stocks.


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