The Dow Jones Industrial Average (NYSEARCA:DIA) has been up every Friday in 2013, a streak that pales in comparison to the 10 up days in a row which the index had also enjoyed, until today. The streaks end today, does their end signal that the market is finally putting an end to extremely low volatility seen in both the Dow and the S&P 500 (NYSEARCA:SPY)? Would this also indicate the end of the bull rally since mid-November (more than 13% and 12% respectively)?
The fundamentals have not changed over the past several weeks as the rally has forged ahead through the Dow all-time highs. The companies that make up the Dow and S&P are still enjoying broad support from the Fed, steady spending despite other threats to consumers, and the benefit of the rotation from bonds to stocks.
The bears that cite fiscal policy as a threat to the rally bring up a valid point, but as the Dow and S&P shrugged off the sequester cuts, it will likely continue to become more tolerant of government induced "crises." The major concern in 2013 will be the debt ceiling issue that will come about this summer. Aside from this significant domestic issue, the US equity market largely looks sturdy in terms of capital protection as long as the Fed continues QE3; and in terms of yield, the S&P is still looking better than bonds.
Too many investors are trying to manifest threats to the market. Despite the headlines, the increase in the market has been steady leading to a historically low iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX). One reason for the low volatility is the steady 401(k) contributions and new investment from new participants, a result of job growth. Considering all of the money so many are certain is on the 'sidelines,' the markets could enjoy price appreciation from increased participation alone whether that be through job growth or reallocations to stocks. This point is more significant than many people think. Taking a brief look at the S&P 500 price-to-book values from vectorgrader.com, one can easily see that the ratio is considerably lower than during the past two trips to these levels in the DIA and SPY. From a price-to-book value of around 5.0 in 2000, to just over 3.0 in 2007, the ratio is currently around a 2.25.
Potential investors not already in the market or only tepidly invested are finally starting to contemplate an allocation to stocks after the last recession. The attitude toward stocks has been negative and difficult to overcome; understandable considering that many investors have still not recovered the wealth they lost in the last market collapse. That attitude seems to finally be changing.
While the streak was sure to end, there will be more sunshine for DIA and SPY ahead. Simply, the bull rally continues until facts change or new threats emerge. The next stop for the SPY and DIA may be uncertain for the very near term, altitude sickness plays as big of a role as any. Technicians fear major resistance in the 1565-1567 area, less than a quarter of 1% away from yesterday's close and still under 0.5% away today. Aside from increased near-term volatility, the bullish long-term trend should continue and SPY and DIA milestones of 160 and 150 are likely next stops.
Disclosure: I am long VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a professional advisor; my interpretations of the market are independent and should not be construed as advice