We’re within a stone’s throw of Dow 20,000. Will we make it? Will we stay above it? Or, are we about to see a sizable reversal off the highs.
That all depends on whom you ask…
First, it’s important to keep in mind where we have come from.
On Election Day, the Dow closed at 18,333. Now we’re near 20,000 a more than1,650-point move in six weeks. This has been one of the most impressive post-election rallies of all time. However, market valuations are looking stretched in the short-run.
Still, big milestone numbers like Dow 20,000 are psychologically important. These levels generate headlines.
About 44 years ago, the Dow broke 1,0000 for the first time.
We saw a powerful economy, surging corporate profits, reduced fears of inflation and taxation all in 1973.
Cheers broke out as the Dow hit 1003.16. There was renewed confidence. About nine months later, it all fell apart. The market fell 44% from a high of 1,000.
Nowadays, with similar momentum and hope, we’re there again nearing 20,000.
But how will it all end this time?
Well, it all depends on whom you ask.
For some, it’s different this time… or at least, they think it is.
If we look at a one year chart of the Dow, we’re clearly over-extended technically. We’re just dangling out there in a straight line. Most of that has been driven by hope and not much else. The fundamentals don’t support such high levels. In fact, if we look at the Shiller P/E, we can see the Dow is greatly overvalued near where it also died out in 1929.
It’s at a high of 28.04 as we speak.
At the same time, underlying fundamentals are still weak, too. Retail sales are soft with a November gain of just 0.1%, as compared to estimates for 0.4%. Housing is weaker as mortgage rates tick higher. In fact, November housing starts fell 18.7%, as permits fell 6.6% year over year. The dollar is also hitting exports.
Billionaires aren’t comfortable here either.
In fact, Mohamed El-Erian is shifting to cash because “we’ve priced in no policy mistakes,” he says. “We’ve priced in no market accidents, and we’ve ignored all sorts of political issues. It makes total sense to take some money off the table.”
And he’s not the only one.
With the Dow just a stone’s throw from 20,000, the press is still clamoring for new highs.
Confidence is soaring on hopes for ecnomic stabilization and growth. Traders have thrown caution to the wind, and flooded markets with billions of dollars.
All is well… or it would seem.
Meanwhile, the Volatility Index (VIX) has slipped to just above 11 , hovering near its lowest level of the year.
But that’s a problem.
With the VIX so low, it infers that investors arne’t worried about downside. If we have just one moment of disarray, it all comes crashing down, with no preparation.
Some of the big guys on the Street aren’t waiting around, though.
Much like El-Erian, DoubleLine Capital founder, Jeffrey Gundlach has noted that the market rally, the surge in Treasury yields, and U.S. dollar strength appear to be losing steam.
“There’s going to be a buyer’s remorse period,” he says.
Bill Gross has even warned investors should move to cash, as any gains will be “temporary at best,” he notes. “Investors are misguided in betting that promised tax cuts, infrastructure spending and deregulation will spur faster growth.”
Even Goldman Sachs is urging caution.
Does that mean you take 100% of your holdings off the table, and turn to cash? Absolutely not… But it does mean you should be cautious in the markets at such stellar highs, especially when those stellar highs aren’t based on strong fundamental growth.
It does mean that you should protect your gains with good money management.
Have stop losses in place of 25% for stocks… and 35% for options. Have trailing stops in place of at least 15% to protect current gains. Don’t just sit and hope for higher highs without fundamental support, keep your money safe.
That’s one side.
The other side believes all is well… that there’s no problem for Dow 20,000, even Dow 21,000 on hope. Irrational exuberance has others believing in higher highs. Robert Doll for example, chief equity strategist at Nuveen Asset Management says he’s fully invested in the market. When asked if he would hold cash, he responded, “Hold cash? What for? Markets going up.”
Unfortunately, at these highs, I tend to be a bit bearish, considering the absence of fundamental growth. Be safe out there.