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Tue, December 13 at 4:00PM ET

Buy Into Dips Until the S&P 500 Hits 1,900

The Dow industrials capped another week of gains on Friday as a rise in consumer sentiment dominated the news. And the dovish comments of the Minneapolis Federal Reserve president, indicating that the Fed had not yet lowered real interest rates enough, contributed to the gains.

Industrials, financials, energy, materials and technology led the rally. Short covering was widespread due to consumer confidence numbers that jumped to the highest level since 2007.

At Friday’s close, the Dow Jones Industrial Average was up 121 points to 15,354, the S&P 500 rose 17 points to 1,667, and the Nasdaq was up 34 points at 3,499. The NYSE traded 847 million shares and the Nasdaq crossed 514 million. On the Big Board, advancers beat decliners by 2.4-to-1, and on the Nasdaq, advancers were ahead by 2.3-to-1.

For the week, the Dow rose 1.6%, the S&P 500 gained 2.1%, and the Nasdaq was ahead by 1.8%.

UUP Chart
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Trade of the Day Chart Key

Following a continuation gap on May 10, PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) added another continuation gap on Friday, following a string of advances. The bullish development should result in a continuation of lower prices for gold and silver, as well as oil. A run on the dollar and stocks at the same time is usually the result of a strengthening economy.

NYSE Chart
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SPX Chart
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Despite the S&P 500’s spectacular advance of 16.9% year to date, the charts of the S&P 500 and the broad-based NYSE Composite show no slowdown in the advance. Both charts show a relatively high RSI, but neither is above the blue line, which is considered the “overbought zone.” And both show a bullish MACD.

With literally no overhead to restrain either of these broad-based indices, it is not possible to make a chart-based guestimate as to how far the market will run before a correction. But there are some guidelines as to its ultimate goal.

The price/earnings (P/E) ratio of the S&P 500 is at about 14.5 times the forward 12-month earnings estimate of $114.94. It is now above the five-year average of 12.9, but below the 10-year average of 16.9 and the 15-year average of 16.5. The peak of the March 2000 bull market was over 25 times earnings, according to FactSet.

If the S&P were to rise above 1,896, it would be “overvalued” in terms of historical 15-year data, and that is a number on which we should focus. Buy into dips until the S&P 500 reaches about 1,900.

According to technician Michael Murphy, “The S&P 500 is overbought but not overvalued.” He said he feels that the market is in need of a correction because “everybody knows” the market is flying because of the “Great Rotation” from bonds to stocks.

Like Michael, the mistake that most people make when arriving at an investment decision is that they base their judgment on “feelings.” Feelings can be the result of a person’s political persuasion, origin, ethnicity, a persuasive book or article, or just a headache. Feelings are based on emotion, and psychologists tell us that the most primitive and powerful motivator is the power of fear.

With everyone bombarded hourly with fear messages from TV and print media, is it any wonder that the public refuses to buy stocks despite the clear technical evidence that should motivate them to invest?

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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