What to Watch as the Dow Closes in on Record Highs

by Dan Burrows | February 28, 2013 1:25 pm

With fewer than a hundred points to go, everyone’s watching and waiting to see if the headline-grabbing Dow Jones Industrial Average can notch a new record close.

Big deal.

What we should be focusing on are the fundamentals and technicals surrounding this move — and what happens next if the Dow crosses 14164.53.

Watch the News

Remember: Markets never move in a straight line — just look at the spring and summer selloffs of the last three years. And as equities approach levels last seen well before the crash, the technicals are getting strained, while a host of potential rally-killing economic reports are on tap.

This is a little-loved bull market, and, as we saw with the huge selloff triggered by the Italian election, markets are on a hair trigger, ready to tank on the slightest whiff of scary news.

Sluggish economic growth both in the U.S. and abroad (and recession in much of Europe), upcoming across-the-board Federal budget cuts, higher taxes and gas prices — there’s ample reason to be skittish.

As stocks close in on new records, too much money is too smart not to be ready to lock in gains at the first sign of trouble. Since we’re essentially between earnings seasons, the market will be able to give upcoming reports its undivided attention. Any cracks in the figures or worse-than-expected readings could be all that’s needed to set off a sustained pullback.

On Friday we get personal income and spending, as well as two readings on manufacturing, which are key because economic weakness first rears its ugly head in the manufacturing sector.

More troubling, a week from tomorrow we get the mother of all data points: the monthly jobs report.

Then there’s the usual onslaught of data after that, including retail sales, industrial production and housing market figures.

And that’s just here in the U.S. The changing of the month brings a slew of closely watched readings on economies around the world with the release of global purchasing managers surveys.

Watch the Signals and Sentiment

Against this backdrop, there’s no shortage of technical signs and market internals militating against big gains from here.

After spiking in the wake of the logjam results from the Italian election, the CBOE Volatility Index (CBOE:VIX[1]) — also known as VIX, and as the investor fear gauge — is dropping like a stone once again, suggesting too much complacency.

In another contrarian indicator, investor and adviser sentiment is decidedly bullish — even as insider selling hits multiyear highs.

Indeed, looking at the total stock market, insiders — those executives and directors who presumably know more about their business prospects than you do — are selling $45 worth of stock for every dollar’s worth they’re buying, according to data from Thomson Reuters Stock Reports.

That sell/buy ratio hasn’t eclipsed $44 since October 2010.

Then there’s the case that the market looks very much overvalued when looking at cyclically adjusted earnings, which smooth out the effects of unsustainably high margins. By that measure — the Shiller P/E — the S&P 500 trades at 23, or about 40% above the long-term average of 16.5.

Additionally, on a technical basis, the S&P 500 is overbought. As John Hussman, manager of Hussman Funds, writes to investors, the broad market index stands more than 7% above its 52-week average, at least 50% above its four-year low, and two standard deviations above the 20-period average at weekly and monthly resolutions.

Bottom Line

Markets usually trade on some combination of technicals and fundamentals, and both of them are strewn with potholes.

If you’re a long-term investor, you can just chill. A pullback just means you can dollar-cost average into stocks at cheaper prices. But if you’re a trader or tactical investor, tighten up those stop-loss orders — and don’t worry about getting stopped out.

Hey, if we’ve learned anything over the past few years, the market has developed a penchant for spring and summer swoons.

  1. VIX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIX

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