What a great time we are having as the S&P 500 logged its fourth straight week of increases! My favorite exchange trade fund, the SPY, is trading at 166.94 this weekend. Did you know that leading indicators rose by 6% in April, that's the highest level in five years and it looks like the slowdown that analysts were predicting is history. If any of you own energy or industrial stocks you must really be happy as the recent gains were driven by the sectors. We have gained 16% on the year!
The struggles we had five years ago seemed to be but a vapor of a memory. Even the recent expected slowdown because of perceived stingy fiscal policy does not appear to be happening because we have seen recent improvement in the labor market and in retail sales which suggests that the recovery still has legs.
Do you realize we are almost a thousand points above the low we hit in the spring of 2009 because of the credit crunch? It seems like it's going to be really hard to stop this bullish run. Consumer sentiment is extremely high and the economic news that came out in April was also very strong; for this reason I would expect other areas of the market that have not grown as fast like cyclicals may start outperforming the market at any time.
Investors, keep your eyes on three sectors in particular: technology, healthcare, and financials. JPMorgan analyst Thomas Lee believes there is still much upside to the sectors left this year. Sometimes it's hard to figure out when to jump in, especially when this particular bullish run has been going for so long. Investors may be apprehensive about buying something new because they're wondering if this run can last.
Should investors be apprehensive?
As long as there is a demand for products and services people continue to buy, the supplies will be there. Often this is how prices are determined-by demand. Since the stocks keep going up in value, should we believe people are still interested in buying them? Here is an interesting fact to consider: stock buybacks increased by 10% last year which means the supply of "shares" is smaller than it was a year ago. Demand is growing but supplies are shrinking which means prices would naturally increase.
I would expect stock prices would have their foundation in discounted cash flow extrapolated from what analysts believe earnings would look like in the future. But with all the liquidity in our market, and all over the planet right now, stock prices don't appear to be based upon this type of logic. The plain and simple truth is this people are hungry for stocks right now and that is it. Prices are going to go up because people are demanding equities.
Maybe the question isn't whether we will continue to go up, but maybe the question is how long are we going to be able to go up in this extended their rally? Barry Ritholtz, is the author of "The Big Picture" blog and he had this to say about that very thought:
"Give the market the benefit of the doubt, but don't be surprised if we see a little seasonal weakness. You can't go up 20% every four months."
It's a tight line to walk. On one hand this bullish run is exciting and it's fun to make money, but on the other hand one wonders how long the run will keep going. If someone asked me should they get into the market now, what would I tell them? Should I tell them the jump right in? The longer market goes up the harder it is to answer that question.
I would not tell them to just jump into the market, I am always cautious. I would say consider how the market has moved so far and build stop losses into all investments right now.