Attention Those Afraid of Buying at the Top: This Market is Still ‘Cheap’

by Sam Collins | March 13, 2013 2:42 am

In a mixed day of light-volume trading, the Dow extended its winning streak to eight days. It is the longest streak of gains in over two years for the senior index, and in five of those days, it scored new all-time highs. 

However, the S&P 500 fell 0.2%, breaking its string of seven winning days, and the Nasdaq lost 0.3%. The day started off lower on profit-taking and lack of news, and spent the remainder of the day in an attempt to recover the earlier losses, but it lacked the upside volume to completely make it back to breakeven.

At the close, the Dow Jones Industrial Average was up 3 points to 14,450, the S&P 500 fell 4 points to 1,552, and the Nasdaq lost 11 points at 3,242. The NYSE traded 621 million shares and the Nasdaq crossed 379 million. Decliners led advancers by 1.4-to-1 on both the Big Board and Nasdaq.

DJI Chart
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DJT Chart
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Trade of the Day Chart Key[1]

On March 6, the Dow Jones Industrial Average confirmed the Dow Jones Transportation Average’s new all-time high made in late January. This is known as a “Dow Theory confirmation” and is one of the oldest and most reliable of the many tools in the technician’s bag of tricks.

This was the fourth Dow Theory “buy signal” since the March 2009 low, according to Jeffrey Saut of Raymond James. Saut also points out that Dow Theory gave a “sell signal” in September 1999, a “buy” in June 2003, and another “sell” in November 2007. 

We have discussed the theory here many times since I considered it, along with our 17-month moving average, to be the most accurate and graphic of the many theories and techniques. In fact, in the past 15 years, the Dow Theory has been “wrong” only once when it gave a sell signal during the “flash crash” of May 2010.

Conclusion: Our technical indicators, including the Dow Theory and the 17-month moving average chart, as well as breakouts on the other major indices, point to higher prices. This is supported by higher corporate earnings, a slow and plodding economic recovery, lower unemployment, and a supportive Federal Reserve policy of bond buying and low interest rates.

The streak of winning sessions is supported by modest institutional buying while the average investor is still “out in the cold.” Despite the bullish technical outlook, much of the public is still spooked by the dramatic run to new highs and their fear of “buying at the top.”

However, even fundamentally the current stock market, at just 14.3 times expected 2013 earnings, is still “cheap” when compared to the tops made in March 2000 at almost 30 times earnings (tech bubble), or the top of October 2007 at 18-20 times earnings just before the worst economic crash since the Great Depression.

Yes, there will be corrections — some even in the 5%-10% area. But the bull market is with us, and to deny that is to deny reality. My calculation indicates that the S&P 500 will run to at least 1,607, while others, like University of Pennsylvania Professor Jeremy Siegel, call for 1,650, and others for even higher numbers (see March 8 Daily Market Outlook[2]).

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[3].

For a list of this week’s economic reports due out, click here[4].

  1. [Image]:
  2. see March 8 Daily Market Outlook:
  3. click here:
  4. click here:

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