Inside Wall Street: Fear Not -- This Bull Still Has Plenty of Running Room

Gene Marcial's Inside Wall StreetAttention investors: Enjoy the ride and go with the flow. The Dow Jones Industrials and the Standard & Poor's 500 have been hitting higher levels, but the best is yet to come.

Stock market commentators who got their bearings straight and were on the money early on in 2010, when most prognosticators were proclaiming the death of equities, have every right to crow about their conviction in staying bullish against seemingly insurmountable odds. Not many called it correctly, sad to say. The bearish herd almost convinced everyone that the market was headed for the dumps.

This column got a lot of flak from bearish readers when I declared on May 17, 2010, in a bold headline: "Don't Be Too Hasty to Declare the Bull Dead." The Dow Jones industrial average at the time had tumbled to 10,620.16, and the Standard & Poor's 500-stock index had plunged to 1,135.68. The world was coming to an end, proclaimed the naysayers. They were wrong, totally.

I warned at the time that "if you believe the bears' forecast, be very careful. That's because the bulls [whose numbers were dwindling fast then], who analyze the technical [and fundamental] behavior of the markets, have some solid counterarguments on their side."

The Bears Growled Even Louder

A couple of months later, on Aug. 9, 2010, I wrote another column that advised: "Investors Need to Look Beyond the Daily Headlines," which were fomenting intensified volatility that continued to harass even some of the more astute market players. I pushed my bullish sentiment some more, and on Sept. 7, 2010, as the bulls got their hands on the ball, I wrote yet another column that said: "Yes, This Bull Move Could Have Legs." The bears even growled louder at that.

By now we all know what the market has achieved since. The Dow closed at 11,577.51 on Dec. 31, 2010, up 11% for the year, and on Jan. 3, 2011, the first trading day of the new year, the Dow leaped further, to 11,670.75, up 93.24 points, or 0.81% -- the biggest point and percentage gain since Dec. 2, 2010.

The S&P 500 also excelled: The index jumped a solid 12.8%, to 1,257 in 2010. On Jan. 3, the S&P rose some more, to 1,271.89. The market then had a mixed day on Jan. 4, when the Dow closed at 11,691.18, up 0.18%, and the S&P closed at 1,270.20, down 0.13%.

Thank the Economy's Rebound

I have this short answer for those who wonder what could transport the market still higher: the economy. The unexpected and sudden advance that started with September's first day was in anticipation of favorable news about the progress the economic recovery was making. The continuing rebound will now propel the market to even headier levels.

What had pulled down the market in the past couple of years should for now lift it further -- specifically, a steady gain in manufacturing, productivity, housing and, yes, even in unemployment. Already, some of the economic indicators that had looked murky are starting to show some luster, including gains in manufacturing (in the U.S., Europe and China), inventory rebuilding, industrial production and housing and construction spending. Even the employment bogey is starting to show some upbeat numbers. Joblessness is starting to recede, although far too slowly.

And you can bet your bottom dollar that when positive news on jobs and hiring start to pile in, the market will rev up even more.

Another Good Year for Stocks

Ed Yardeni, president and investment strategist at Yardeni Research, who was among the few economists and investment gurus who stayed bullish throughout 2010, remains upbeat about the market and the economy. He says 2011 will be another good one for stocks. Yardeni sees the S&P 500 going to a near-record high of 1,500, up some 19% for the year, slightly exceeding the 18.4% average gain for the third year of the presidential cycle since 1955.

Part of his bullish stance is the shape of the economic recovery he expects (like a V) and the continued rebound in corporate earnings. Overall profits in 2010 jumped 34.8%, notes Yardeni, and the profit recovery of domestic nonfinancial industries and profits from abroad "should remain robust."

In the complex housing problem, a bottom in new-home sales may have already started, given November's 5.5% increase, notes Yardeni. And existing-home sales may also have hit a floor, although he senses that the recovery will likely be sluggish.

As to his bullish market outlook, Yardeni cautions that there is a "too-much-of-a-good-thing" scenario that could be led by a jump in commodity prices. "My biggest concern for the new year is that my bullish year-end targets for stocks and commodities will occur by the middle of the year." That, indeed, could be a quick "positive" problem because he worries that such a "melt-up" might result in a significant meltdown in the second half.

Bears Haven't Thrown in the Towel Yet

My attitude about the market is to watch the bears, who look very closely for what could go wrong with the economy and the market. When they turn positive and start joining the bullish crowd, that's the time to get concerned. Although there are signs that the bull/bear ratio is showing that the bull side has jumped to its highest level since April -- a negative indicator to the contrarians -- the bears are still far from throwing in the towel. So it's not yet time to worry.

And while some bears are already forecasting a pullback in the Dow to 11,000 by February, the savvy bulls see more positive factors that should continue to push up the market.

One important technical number to note, for instance, is that although the market has already gone up as much as it has, the Dow is still more than 2,493 points, or some 17%, below its record closing high of 14,164.53 reached on Oct. 9, 2007. That's a lot of points to make up before the market regains that peak. So, for as long as the Dow is way below that high point, I wouldn't worry.

Surely, the market will rise and fall as it heads toward that historic all-time record, and it would be a very healthy sign if stocks were to correct, or pull back, as the market moves further ahead. The worst thing would be for stocks to go straight up without allowing for some correction along the way. In fact, investors should welcome these pullbacks so they can get in or catch up with the ascending market indexes.

Thus far, equities are performing superbly. The Dow is up 78% from its 12-year closing low of 6,547.054 on Mar. 9, 2009. However impressive that may be, the smart money is betting that market has a lot more upside spirit and that it isn't done climbing.

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11 Comments

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masser

Yesterday jobs report amazing, today filings up, one has to be pretty stupid not to get this picture, keep on gambling

January 06 2011 at 10:50 AM Report abuse rate up rate down Reply
katehall123

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January 06 2011 at 2:19 AM Report abuse rate up rate down Reply
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January 05 2011 at 8:21 PM Report abuse rate up rate down Reply
bkupper1

Gene
always a pleasure reading your point of view
Happy New Year
Bill Kupper

January 05 2011 at 6:30 PM Report abuse rate up rate down Reply
Gumby

YOu can either invest in stocks that help spread wealth to the masses or invest in stocks that do not do that but keep the masses poor and miserable... Some investors have funny thoughts!!

January 05 2011 at 2:19 PM Report abuse rate up rate down Reply
2 replies to Gumby's comment
Gumby

Mike,, aluminium next! buy !

January 05 2011 at 4:35 PM Report abuse rate up rate down Reply
Gumby

Gene, you are right about the bull rally this year only if those old high flyers like Apple, Salesforce, Chipolte, Amazon, Priceline, Netflix, and others pauses or fall first. There can be just much money inflowing and to have those old highflyers keep climbing, I dont think there is much room.. If Wall Street keep insisting on those old highflyers, you can either stick with them or dump them for new ones like Ford, General Electric, Oracle, Alcoa, and so many other stocks that is not realizing its fair value yet by far. I doubt that we can have them both.. It is a tug between those camps.. I think that some of the old highflyers will keep going at a slower pace if they can get away with it. I find it so amazing that short sellers have yet ot touch those old highflyers..while keeping riding hard on the latter. There can be only so much money splashin' out there and there is no way you can stretch it.. Dump and buy !!~ I think Apple is the most likely one to dump first because its competitors are already gearing up for a massive attack against Apple's iPhones and iPads, etc. Amazon is still growing. Netflix is growing vulnerable to streaming movies like Blockbuster did to Netflix.. Netflix cannot last.. Salesforce may be hammered by Oracle's own cloud.. Oil stocks is certain to climb because we are still so slow with alternate energy because of heavy emphasis on obsolete photovoltaics . Engineered mirror technology that will replace photovoltaics will be tailored to many new direct solar applications based on concentration of sunlight. Conversion to electricity from sunlight will probably never be more than 40% efficient at all. Engineered mirror technology is easily over 90% efficient.. Our economy just cannot grow and repay debt with photovoltaics... NEVER!!! Lets get serious!!

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January 05 2011 at 7:54 AM Report abuse rate up rate down Reply
ajallenky

Ah yes, this bit of insight from the same group that hosed thEW average person out of 50% of their investments !! These barracudas NEEED more new blood in the water so they can run up the prices of their stocks before they sell out and watch the ignorant public crash down again - why not ??!! The Fed is making the Treasury print money faster than any time in our history with QE1 and QE2 and there is no end in sight - might as well throw it away betting on your favorite pony in the stack market rather than watch it erode away into useless paper I will put mine into solid commodities - they may go up and down some BUT as more people become middleclass in the world, like China and India, they will want more goods and services and that means MORE DEMAND for finite resources - more demand and limited supply means higher prices in the long term.

January 05 2011 at 7:45 AM Report abuse +1 rate up rate down Reply