Is The S&P 500 Doomed After Topping 1,700?

 |  Includes: DIA, QQQ, SPY
by: Lou Basenese

Welcome to Stock Market Wonderland! For the first time in history, the S&P 500 Index crossed above the key psychological level of 1,700. And stayed there, no less. Meanwhile, the Dow is trucking toward 16,000. (Is 20,000 next? Well, not exactly. At least not by Friday.)

The catalyst for the thrust higher is stronger-than-expected economic data. (Who knew?) The ISM Manufacturing Index jumped from 50.9 to 55.4 in July -- its largest one-month increase in 17 years. Overpaid weathermen -- I mean, economists -- only expected an increase to 53.1. What's more, initial jobless claims dropped to their lowest level in almost six years, to a seasonally adjusted 326,000. And as I've shared before, stocks love less joblessness.

Notwithstanding these legitimate causes for the latest tick higher, many pundits want us to believe that this stock market fairytale can't last. Or, more simply, that we've once again "come too far, too fast." I'm getting tired of hearing that as an excuse for why the stock market can't possibly keep rallying.

As Dragonfly Capital's Gregory W. Harmon says, "Long-term breakouts are a fact in the market. They just happen." It's only when they happen for the S&P 500, says Harmon, that pundits suddenly forget this reality. Exactly! Here are three reasons why you shouldn't believe that the bull market is suddenly doomed just because the S&P 500 topped 1,700:

Reason No. 1: The Rally Is Not Defying Fundamentals

Stock prices ultimately follow earnings. Period. And that's precisely what's happening. Profits for S&P 500 companies have more than doubled from the 2008 lows. So like good lemmings, stock prices are simply following the leader. Just like they always do.

Granted, stock prices are up a little bit more than profits. At about 15 times forward earnings, though, valuations are hardly overstretched. Or as Josh Brown of The Reformed Broker says, we're now in "fairly valued, but not richly valued, territory." Don't worry. When stocks start getting expensive, I'll warn you. But they're not right now.

Reason No. 2: The Right Leaders Are Leading

Bull markets flame out when a handful of large-cap stocks are driving prices higher. But they endure when small caps lead the charge higher. And that's precisely what’s happening. Still. At the same time that large caps (represented by the S&P 500) hit a record high last week, so did small caps (represented by the Russell 2000 Index). As long as it's a small-cap world, it's game on for the bull market.

Reason No. 3: We're Nowhere Near Nirvana

Right now, the average American doesn't expect stock prices to head higher. Not like they did, say, during the height of the dot-com bubble. Instead, they're scared stiff that the bull market won't last. All we've done is scale wall of worry after wall of worry -- which, by the way, is perfectly normal.

In case you forgot, we've already climbed walls of worry regarding sequestration, unemployment, currency wars, Europe, high-frequency trading, a slowdown in China, weak earnings, falling commodities prices -- the list goes on. And now we're contending with worries over the Fed taper and higher interest rates.

Look. When investors stop worrying and all of a sudden enter a state of stock market nirvana, that's when we should start worrying. But we're nowhere close. Case in point: the American Association of Individual Investors' sentiment survey. While the stock market has leapt higher into uncharted territory, bullish sentiment has decreased for three weeks in a row. At 35.6%, it's hovering below the long-term average of 38.9% -- and miles away from the euphoric levels (north of 65%) hit before the dot-com collapse.

Bottom line: Optimism should be your default setting right now. (Stay long and strong.) When I get the first whiff of a valid reason to be worried, I'll share it, along with some selective short candidates.