Dow's Surge to 12,000 Echoes April With 81% of Stocks Above Average Price
Dow’s Surge to 12,000 Echoes Last Time Market Slumped
Tim Boyle/Bloomberg
Traders work in the S&P 500 pit on the floor of the CME Group's Chicago Board of Trade.
Traders work in the S&P 500 pit on the floor of the CME Group's Chicago Board of Trade. Photographer: Tim Boyle/Bloomberg
Jan. 26 (Bloomberg) -- Ed Butowsky, managing director at Chapwood Capital Investment Management LLC, Rick Bensignor, managing director and chief market strategist at Dahlman Rose & Co., and Antione Drean, founder of Triago SA, talk about the outlook for U.S. stocks. Equities rose today, sending the Dow Jones Industrial Average above 12,000 for the first time since June 2008. Butowsky, Bensignor and Drean speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
Jan. 26 (Bloomberg) -- Wasif Latif, president of equity investments at USAA Investment Management Co., talks about the outlook for U.S. stocks and corporate earnings. U.S. stocks rose today, sending the Dow Jones Industrial Average above 12,000 for the first time since June 2008. He speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." Andrew Keene, an independent trader, also speaks. (Source: Bloomberg)
Jan. 25 (Bloomberg) -- Christian Thwaites, chief executive officer of Sentinel Investments, Jack McDonald, president and CEO of Conifer Securities LLC, and Michael Harkins, president of Levy Harkins & Co. Inc., discuss the outlook for U.S. stocks. They talk with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
Jan. 25 (Bloomberg) -- Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the outlook for the U.S. economy and stock market. He speaks with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Investors who pushed the Dow Jones Industrial Average above 12,000 for the first time since 2008 this week may be getting ahead of themselves.
The gauge surpassed that level the past two days before plunging the most since 2010 today, preventing the longest stretch of weekly gains since 1995. As of yesterday, more U.S. stocks were trading above their 200-day average price than any time since April, when the Dow began a 14 percent slump, and the cost to insure against Standard & Poor’s 500 Index losses fell to an almost three-year low.
The Dow may have surged too fast following its more than 2,000-point jump since August even as analysts forecast a third straight year of profit growth for the S&P 500, said James Investment Research Inc.’s Tom Mangan and BB&T Wealth Management’s Walter “Bucky” Hellwig. Mangan and BGC Partners LP’s Michael Purves see signs investors are too optimistic about the next few months.
“We expect a setback of 10 percent or more in the S&P 500 and the Dow,” said Mangan, who helps oversee $2.4 billion in Xenia, Ohio. “The market is going to face much stronger headwinds over the next months as the rally gets old and it gets increasingly difficult to find a rationale for further gains, but there will be a lot of buyers on a pullback and it would probably be a short-lived decline.”
Profit Growth
Income for S&P 500 companies rose 30 percent last year, the most since 1995, and more than 70 percent of companies in the index have exceeded analyst profit estimates for six straight quarters, the longest streak in Bloomberg data going back to 1993. The Dow has surged 83 percent to 11,989.83 since sinking to an almost 12-year low in March 2009. The average of 12 forecasts from Wall Street strategists tracked by Bloomberg News calls for a 6.5 percent rise in the S&P 500 through Dec. 31.
The 114-year-old Dow rose above 12,000 for the first time since June 2008 on Jan. 26 and again yesterday when it climbed as high as 12,019.53. It ended the day at 11,989.83. The Federal Reserve’s Jan. 26 announcement that it would maintain stimulus measures and reports showing better-than-forecast home sales has helped send the S&P 500 higher for five straight days through yesterday.
The Dow fell 166.13 points, or 1.4 percent, to 11,823.70 at 4 p.m. in New York after declines in Ford Motor Co. and Amazon.com Inc. and intensifying unrest in Egypt overshadowed an acceleration in American economic growth. The S&P 500 decreased 1.8 percent, the most since Aug. 11.
‘Overbought Conditions’
The rally since March 2009 drove 81 percent of companies listed on the New York Stock Exchange above their 200-day average price, the most since April 29, according to data through Jan. 26 from Birinyi Associates Inc. The S&P 500 rose to its 2010 high April 23, then fell 16 percent through July 2.
A measure of the degree to which S&P 500 gains outpace losses has jumped. Its 14-day relative strength index rose to 71.84 yesterday. The RSI exceeded 70 for five straight days through April 15, before the S&P 500 peaked.
Investors are paying less for protection from losses. The Chicago Board Options Exchange Volatility Index, or VIX, fell to 15.45 on Dec. 22, the lowest since 2007, and closed yesterday at 16.15. It’s fallen 65 percent since last year’s peak.
“I’m concerned about a correction because volatility is demonstrating considerable complacency,” said Purves, chief market strategist at BGC Partners in New York. “We’ve had a near breathless rally since August, the technical signals suggest overbought conditions. The VIX is at a low, sentiment is high and valuation has come up a lot in the past four months. It’s time to get the hedges on.”
DuPont, Apple
Purves said the S&P 500 is likely to fall at least 7 percent by the end of February.
Stocks have risen this week after the Fed maintained plans to buy $600 billion of Treasuries through June, supporting the economic recovery. Companies from DuPont Co. to Bank of America Corp. and Apple Inc. have exceeded earnings estimates in the past two weeks, among 75 percent of S&P 500 stocks that have done so, according to data compiled by Bloomberg.
“The quality of fourth-quarter earnings will ultimately determine if we get a correction,” said Mark Freeman, co-chief investment officer at Dallas-based Westwood Management Corp., which oversees about $11 billion. “It’s more difficult to argue the market is overbought or needs a correction if underlying earnings are still coming in at a fairly strong pace.”
Individual Investors
The U.S. equity market may have regained the confidence of individual investors. Net flows into U.S. stock funds totaled more than $6.7 billion in the two weeks ended Jan. 19, according to estimates from the Washington-based Investment Company Institute. That’s a reversal from 2010, when about $90 billion was removed in about eight months, according to ICI data.
“The biggest sin in the equity-management business is missing an up move,” said Liam Dalton, New York-based president of Axiom Capital Management Inc., which oversees $1.4 billion. “This huge rally, it chases money in and it perpetuates the trend. We haven’t exhausted all of the buying power.”
The Dow Jones Transportation Average has slipped 1.8 percent from its 31-month peak on Jan. 13, including the 3.5 percent slump over four days through Jan. 21. Retreats in truckers and shippers that are considered proxies for the economy may foreshadow losses in the rest of the market, according to Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama.
Index Ratios
The ratio between the prices of the transportation average and the Dow Jones Industrial Average fell to 0.422 on Jan. 25 from 0.446 seven days earlier, according to data compiled by Bloomberg. The decline was the biggest over the same number of days since October 2009. The last two times the ratio decreased more, the Dow industrials went on to fall an average of 12 percent, data compiled by Bloomberg show.
“The transports tend to lead the overall market,” Hellwig said. The S&P 500 has exceeded its average from the prior 50 days since September. “When you see the S&P 500 staying above its 50-day moving average and then you see the transports moving down, that could be seen as a sign there’s a divergence, a reversal in the trend,” he said. “That would be a warning sign.”
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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