Taking Stock

Tony Crowell

Tony Crowell

New Record, Now What?

Despite today’s unsettling news of U.S fiscal issues, investors continue to buy stocks with enough enthusiasm to send the Dow Jones Industrials Average to a new high. They did it again the next day and the day after that. This newly reestablished uptrend could, of course, reverse at anytime but the market, itself, is one of its own most reliable technical indicators. Barring some sudden adverse event such as a nuclear “incident” involving a rogue nation, market history indicates a high probability of further advances.

Generally, the longer trends of the stock market anticipate the growth of the U.S. economy while shorter-term trends pivot on investor moods swinging between enthusiasm and despair. Investors often exhibit a gambler’s fascination with round numbers and the recent rise above its previous 2007 peak of 14,164 shows a more determined tone than, for example, when it limped above 1,000 in November 1972. It immediately reversed and did not regain 1,000 until November 1980.

This round number obsession means that the Dow may hesitate as it attempts to pierce the 15,000 level. Before that, attention will focus on the 1565 level on the S&P 500, its record high set in 2007. This is less than 2% above today’s levels for this much broader average. A new record for the S&P would be encouraging.

The “Dow Theory” is one of the more ancient theories of market analysis, dating back to editorials by Charles Dow in the nineteenth century. It links movements in the Dow Jones Transportation Average to those in the more familiar Dow Jones Industrial Average. Recently the Transportation Average also made a new high, which the traditional Dow Theory views as “confirming” a bullish trend.

Well, maybe, but, as always, the fundamental things apply. Corporate earnings continue to grow and, by some estimates, the forecast for 2014 of overall earnings for all 500 companies in the S&P is twice their level at the time of its previous record level in 2007. Forecasts often err on the optimistic side but, even so, that is a remarkable margin of safety on the valuation side of the market. The weak spots continue to be the dragging level of employment with its resulting effect on consumer confidence and spending. A housing recovery would help immensely and there are signs of its slow recovery accelerating.

Chairman Bernanke’s policies are a strong support for this bull market. Warren Buffett complimented his efforts recently, saying, “Cheap money makes things happen.” The economy still needs to pick up the baton but the Chairman has indicated he will continue the Fed’s supportive policies until it does.

Unlike the Dow Jones Average, which gives the same weight to a one-point move in Alcoa (AA-$9) as to one in IBM (IBM-$209), the S&P 500 is weighted to the market caps of its components. Apple (AAPL-$430) has the largest weight, as it also does in the portfolios I manage. Had Apple not begun its nearly 300-point swoon last fall, the S&P would easily have beaten the Dow to a new record.

As the largest target, Apple draws frenzied attention from financial critics who regard it as pigeons do a statue of a hero. It is currently trading at less than ten times current earnings with at least ten percent gains on tap when it next reports earnings in late April. Until such actual news, its stock price may wobble with rumors but its value remains unquestioned.

This petty pecking has also dragged down price performance of recent addition Intuitive Surgical (ISRG-$513). Like Apple, the solid earnings report that I expect in April should subdue critics for a while.

Until investors acclimate to new high ground, increased volatility is likely. New buys should emphasize high quality, growing companies, among them Celgene (CELG-$110), BlackRock (BLK-$248), Chicago Bridge & Iron (CBI-$55), Eastman Chemical (EMN-$72) and Allergan (AGN-$105). Investors concerned with market volatility should consider an ETF, iPath VIX Futures (VXX-$21), which replicates the performance of the volatility of the S&P 500. Meanwhile, new highs are increasingly probable although, as usual their timing is unknown. Guessing market direction seldom works; anticipating it with quality stocks usually does.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com






About the Author

Leave a Reply