Thursday, March 7, 2013

The bull market continues to rampage

Just one day on from Dow at all time high, the DJIA continues to set records, as the Washington Post reported in After a record day, the Dow Jones industrial average keeps climbing on Wall Street.  That's an Associated Press article, so I won't quote it.  Instead, I'll direct your attention to this article from MSN Money: Forget the Dow; watch the S&P 500.
It's grand that the Dow has hit new records, but many market experts see a new high for the S&P 500 confirming the rally's strength. Maybe they're right.

Now that the Dow Jones Industrial Average has broken its 2007 record, the big question is when will the Standard & Poor's 500 Index push to new highs.

The betting is soon, and there's chatter that a new high for the index means the four-year bull rally will continue.

It did not happen on Wednesday. The S&P 500 closed up 2 points to 1,541 but is still 24 points below its 2007 peak close of 1,565.15. The Dow was up 42 points to 14,296, a new closing high; it also set a new intraday high of 14,320.65. The Nasdaq Composite Index slipped 2 points to 3,222.

It makes sense that the S&P would give analysts optimism. The obvious reason is the Dow consists of just 30 stocks; the S&P 500 includes 500 stocks and represents roughly 75% of the entire U.S. stock market capitalization.
The author is on to something.  The Dow may be well-known and flashy, but it's not the best indicator of the strength of the stock market; the S&P 500 is.  It also is less prone to bubbles, as the article describes in this capsule history.
On March 24, 2000 the S&P 500 closed at what was then an all-time high of 1,527.46. It fell for the next two-plus years before bottoming in October 2002 -- as the U.S. stock market was crushed by the dot-com bust and then the aftermath of the Sept. 11, 2011 terror attacks.

The index didn't top its 2000 high until Sept. 27, 2007. Eight sessions later, it peaked and fell 57% over the next 17 months.

Market bulls will say that the Dow offers a different scenario for stocks.

The Dow's new record has been built on low U.S. interest rates, rising profits among most of the Dow companies -- all big multinationals -- and continued cost-cutting that has limited employment growth in their U.S. operations.  The Dow's big run has nonetheless cheered analysts, many of whom believe it suggests the rally has another year or so to run.

That's because the Dow broke its 2000 record close in August 2006 and moved 3,000 points higher over the next 12 months.
It looks like I've been using the wrong index to look for a top.  I should be using the S&P 500.  Time to switch my attention.

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