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Dow hits record - Buy or Sell?

9:57 AM, Mar 6, 2013   |    comments
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NEW YORK (USA TODAY) It took 5½ years, but the Dow on Tuesday finally crossed over its record closing high of 14,164.53 set in October of 2007.

Now what?

For investors, the question is pretty much the same as the one posed by English punk rock band The Clash in 1981 in its popular tune Should I Stay or Should I Go.

Given that dilemma, we'll let investors make up their own minds. For a look at the bullish call, here are five reasons to buy now:

1. Bull has gas left in tank. History says there's more money to be made. The bull, which began in March 2009, is just entering its fourth and final stage, Laszlo Birinyi, founder and president of investment research firm Birinyi Associates, said in his 2013 preview. And the last phase, which he dubs the "exuberance" stage, historically has been a wildly profitable one for investors, with average gains of 38.7% in bulls since 1962. The first stage is "reluctance" (average gains of 49.4%), followed by "consolidation" (+6.4%), "acceptance" (+18.8%) and finally exuberance. "Our view," Birinyi wrote, "is that we are in the fourth leg of a bull market which will extend through most of 2013."

2. No signs of recession ahead. Economic contractions are often the cause of stocks heading lower. But incoming economic data are "not indicating that a recession is imminent," says James Stack, editor of InvesTech Research newsletter. He points to recent surveys that showed that both manufacturing and the services portion of the economy topped analysts' expectations in February and are at levels that suggest growth not contraction. An improving jobs market and a recovery in the housing market are also big economic pluses.

3. Cash stockpiles are ample. Capital is the fuel that powers bull markets. And right now there is no shortage of cash available that could eventually find its way into the stock market. "There's a lot of cash sloshing around the system," Birinyi notes. At the end of 2012, there was nearly $10 trillion parked in money market funds, bank savings accounts and certificates of deposit, according to Federal Reserve data. There's also another $1 trillion that has been funneled into bond funds in the past five years ended in 2012 by risk-averse investors, according to the Investment Company Institute, a fund company trade group. Add to that the roughly $1 trillion in cash sitting on balance sheets of non-financial companies in the Standard & Poor's 500-stock index, and you are talking about a lot of potential firepower.

4. Shift from bonds to stocks underway. Wall Street is dubbing it the "Great Rotation." In short, that catchy phrase describes an investor mind-set shift from playing it safe to taking risks again. And the asset allocation shift is already underway, according to Michael Hartnett, chief investment strategist at BofA Merrill Lynch. Want proof? In the seven weeks ended Feb. 20, net inflows to stock mutual funds totaled $54.2 billion. January marked the first month of positive cash flows for stock funds in a year, according to ICI data.

5. Market still priced right. Despite the Dow's 118% gain since the March 2009 low, stocks aren't pricey by historical standards. The broad market, as measured by the S&P 500, is trading at less than 15 times last year's earnings. That's not only lower than the average price-to-earnings ratio of 18.8 since 1998, but it is also lower than the peak P-Es in the past five bull markets, according to LPL Financial. In short, bull markets don't typically end with P-Es this low. At the last market peak, in 2007, the S&P 500 was trading at nearly 17 times earnings. Stocks were even more richly priced in 2000 when the P-E topped 28, LPL data show. "Bull markets end at higher stock market valuations," says Jeff Kleintop, chief market strategist at LPL.

But...

Not everyone sees new highs as a reason to put more money in stocks. Here are five reasons behind the bearish call:

1. Bull is getting up in years. Just like Baby Boomers, the current bull market, which was born March 9, 2009, is nearing its Golden Years. It turns 4 years old on Saturday, and only five of the past 11 bulls have lived to celebrate their fifth birthday, according to S&P Capital IQ research firm. And the average bull since 1932 has lasted roughly 4½ years, says S&P Dow Jones Indices. In short, no bull lasts forever. "The bull," says James Stack, editor of InvesTech Research newsletter, "is in the latter stages of its lifespan." 

2. Market milestone could spell trouble. Stock market records and big round numbers such as Dow 14,000 and Nasdaq 5000 often cause a market pause or even a downturn. The Dow closed above 14,000 only nine times in 2007 and nine days this year through Monday's close. Similarly, the Nasdaq composite, which peaked at 5048.62 in March 2000, closed above 5000 only twice before crashing. 

What's more, the Dow crossed 1000 for the first time on Jan. 18, 1966, stayed there for just that one day and didn't close above that milestone again until November 1972. It didn't stay above the 1000 milestone for good until 1982. "Those big milestones always cause investors to say, 'Oh, if it is at these levels, I might want to sell a little,' " says Andy Brooks, head trader at mutual fund giant T. Rowe Price.

3. Budget battles looming. Sure, Wall Street breathed a sigh of relief when the "fiscal cliff" was avoided and the debt-ceiling debate was pushed out to the future, but budget battles in Washington are far from over and fears about what could and will happen might rattle investors. "We are moving into a period of budget trench warfare," Jason Trennert, founder of Strategas Research Partners, warned clients recently. On March 1, the first phase of $1.2 trillion in across-the-board federal cuts on defense and discretionary spending, known as the sequester, kicked in after lawmakers couldn't agree on more specific and less-draconian cuts. It's unclear whether lawmakers can get a deal done soon to soften the economic blow as the cuts start to take effect. Later in March, the continuing resolution authorizing FY2013 spending expires, which could result in a government shutdown.

4. Popularity kills bulls. If the market keeps going up and people think it is invincible, it could suffer from the so-called Apple effect. The PC and device maker was white-hot and emerged as the No. 1 stock in the world only to suffer from being overloved, eventually enduring a more than 35%-plus drop from its record high. "Popularity kills," warned Ned Davis Research's senior investment strategist Ned Davis. "By the time a stock is No. 1 in the market, nearly everyone owns it, and the story is well known. And, generally, what everyone knows in the market is not worth knowing, because the positives are already discounted in the price."

5. Calls for a correction grow louder. The stock market has now gone 519 calendar days without a 10% decline, ranking it the 10th-longest spell without what market watchers define as a correction, according to Bespoke Investment Group. But what goes up must eventually come down.

And that's a reason why many Wall Street pros say the market is due for a downturn. Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter, says a 5% to 7% drop is possible, citing an "overbought" market, policy risk in the U.S. and rising political uncertainty in debt-strapped eurozone countries, such as Spain and Italy. The talk on Wall Street for a while now has been that a 3% to 5% correction is coming. In a research note titled "Too Far, Too Fast," Mark Luschini, chief investment strategist at Janney Montgomery Scott, said the market is entering a "danger zone" and questioned whether the pace of the market rally is sustainable. "We suggest it is not likely," he said.

USA TODAY

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