July 17, 2007

EVERY NEXT 1,000 IS EASIER:

The Dow Nears a New Pinnacle: The blue-chip average pulled up 50 points shy of 14,000 Monday. Better-than-expected earnings this week could push it over the top (David Bogoslaw , 7/16/07, Business Week)

In view of the size of last week's gains, the Dow could hit 14,000 any day, says Art Hogan, chief market analyst at Jefferies & Co. But the higher the index goes, the smaller the percentage gain is between major milestones, making the next significant threshold all the more attainable according to market psychology, he adds. Hence, the feat of advancing from 13,000 to 14,000 is much less daunting, or impressive, than the move from 10,000 to 11,000 once was.

But there are fundamental factors that are bolstering that technically oriented view of the market, he said. He estimates that the aggregate growth rate in earnings for the Standard & Poor's 500 Index will be 4.5% in the second-quarter. But given that earnings growth in the first quarter was more than double the forecast of 3.8%, earnings could substantially exceed estimates, causing analysts to adjust their models and give added credence to the notion of extended gains to come, he said.

The fact that the U.S. economy will probably be stronger in the second half of the year than in the first half, and that roughly 40% of the Standard & Poor's 500 are tied to the global economy rather than only the domestic economy should also support stock prices, Hogan said. Barring some momentous oil price shock or interest rate hike, he predicted that stock valuations were sustainable for at least the next six months and probably into 2008.

From the perspective of Michael Farr, of Farr, Miller and Washington LLC in Washington, D.C., the five-year-old bull market has entered its final psychological phase, characterized by the kind of exuberance that shrugs off all bad news -- higher oil prices, new terror alerts in the U.S. and the United Kingdom -- and embraces all good news. It's the kind of exuberance that former Fed chairman Alan Greenspan called irrational.

But that doesn't mean there's any imminent danger of a major correction. "Trends and momentum can last a long time," Farr says.

He notes that this is the longest run the stock market has had since 1926 without a 10% correction, and he thinks that a correction, whenever it comes, will feature "a significant rotation among sectors and sector performance," with basic materials giving up the ghost to blue-chip mega-cap stocks that are best insulated from currency moves and that have seen earnings increase over the past six years without a commensurate gain in the stock price.

The comparative dearth of negative earnings pre-announcements for the second quarter and the uptick in the Institute for Supply Management manufacturing index into the mid-50 range are also adding to investor confidence about the state of the U.S. condition, said James McGlynn, of Summit Investment Partners.

Posted by Orrin Judd at July 17, 2007 6:46 AM
Comments

If DC wasn't so dsyfunctional now would be a good time to bring up Social Security reform again.

Posted by: AWW at July 17, 2007 7:08 AM

In an act of self-parody, MSNBC.COM headlined the story about Dow 13,950 with:

"DOW CAN'T REACH 14,000"

Posted by: Bob Hawkins at July 17, 2007 12:00 PM
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