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How High Are We Headed?

Let's look at the possible ultimate targets for the Dow and S&P 500


The recent pattern of a lower opening was broken Thursday as stocks jumped higher on the opening and continued to advance throughout the day. The S&P 500 closed to within two points of its record close, and the Dow Jones Industrial Average advanced for the 10th straight session — its longest winning streak since November 1996.

The advance was propelled by a Labor Department report that showed the number of U.S. workers filing new jobless applications fell below economists’ predictions. The pros were looking for an increase in applications, but the report showed that benefits actually fell.

At the close, the DJIA was up 84 points to 14,539, the S&P 500 rose 9 to 1,563, and the Nasdaq gained 14 points to close at 3,259. The NYSE traded 677 million shares, and the Nasdaq crossed 377 million. Advancers outpaced decliners by about 2-to-1 on both major exchanges.

With the Dow breaking to new highs and the S&P 500 close to a breakout, it’s time to consider the possible ultimate target of the bull market. But first, a disclaimer: From a purely technical standpoint, it is pseudoscience to place 100% reliability on these targets. This is simply because, in the case of the DJIA and the S&P 500, there are no resistance zones to consider since both are in “thin air.”

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Trade of the Day Chart Key


Nevertheless, I’ll give it a rough attempt: The DJIA’s breakout was at 14,128, and its recent major low was made in November at 12,471. Thus, using the method of calculating head-and-shoulders formations, with which our readers must now be familiar, subtracting the low of 12,471 from the breakout point of 14,128 equals 1,657. Add 1,657 to 14,128 = 15,785, 8.6% above last night’s close.

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Using the same method for the S&P 500, subtract the low of March ’09 at 667 from the breakout point of April ’11 at 1,370 = 703. Add 703 to 1,370 = 2,073, 33% above last night’s close.

It is reasonable to ask why the enormous difference between the Dow percentage advance and that projected for the 500. Answer: P/E multiple expansion. In past bull markets, the more speculative issues — especially mid-cap stocks — were subject to this expansion. This explains why the Nasdaq, at 3,259, is so far from its all-time high of 5,133 — the top of the tech bubble of March 2000.

Conclusion: Multiple expansion means that investors are willing at some point to pay more for stocks that they believe will have a faster rate of earnings growth than others.

On Monday, I’ll address some of the reasons for multiple expansion and which ones could have an impact on future stock prices.

Today’s Trading Landscape

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

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

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