Why Stocks Could Push Higher

Can the Standard & Poor’s 500 go higher? The Aug. 17 selloff, which saw the S&P 500 drop 2%, prompted hand-wringing about an imminent market collapse. And even S&P 500 recovers some of the losses (it’s up 2.5% since and is now back over 1,000 at this writing), investors remain focused on when stocks will finally correct. BusinessWeek’s Ben Steverman supplied five indicators to watch for signs of a market reversal. As my colleague Aaron Pressman wrote on Aug. 6, “Even as the stock market continues to push higher, investors remain doubtful.”

It’s not hard to see why. Much of the economic news seems grim. Unemployment continues to rise. Consumers are hoarding cash and are unlikely to return to their spendthrift ways. Oil is back over $70 and some economists worry it could derail a fragile recovery. And although earnings and revenues surprised to the upside this quarter, both are down over 30% from last year. No wonder investors are questioning how the market can go any higher.

But don’t be shocked if it does. Bloomberg collected estimates from eight strategists and only one, Barclay’s Barry Knapp, predicted a 2009 yearend close below 1,000 (Knapp’s prediction: 930), while JPMorgan strategist Thomas Lee predicts the S&P 500 will finish 2009 at 1,100. The average was 1,034. Linda Duessel, an equity market strategist at Federated Investors who was not included in Bloomberg’s roundup, says she wouldn’t be surprised if the S&P closed around 1,200 by the end of the year.

Perhaps that’s just a sign of experts being overly optimistic. A recent Merrill Lynch study found that 75% of money managers were optimistic about the market’s prospects, which DailyFinance’s Tim Catts seizes on as a sign of an impending selloff. Maybe it’s smart to grow cautious when the rest of the crowd turns strongly bullish (or bearish, for that matter). But in my former life as a trader, I learned that there is no “should” when it comes to how the stock market behaves. Bad news can just as easily spur a round of buying, and good news can precipitate a selloff. Markets rarely perform to a set of preconceived notions.

Keep that in mind the next time someone tells you what the market should be doing.

Bonus Question: Is the S&P 500 more likely to finish 2009 at 800 or 1200?

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