The Dow Jones Industrial Average (more commonly known as the Dow) hasn’t spent many days marking a price above 14,000. Before this year the index registered that price or higher on only 15 days in 2007. This month so far the index has reached above that level six times and the price has managed to close higher than 14000 only twice. It isn’t any wonder that the market may be stalling at this level.
Can this index go higher? In 1966 the index broke above 1000 for the first time, but it took 15 years before the market could trade above that level and never return. Sometimes a psychological barrier to stock prices can be a strong thing.
In this circumstance, however, the Dow is not likely to find lasting resistance at 14000. Though it may pull back for a few days this week or next, before long it will likely find itself moving above 14000 and breaking historic highs throughout this year. That may seem like a bold prediction but it really isn’t.
$DJI – Weekly Chart
Consider that the Russell 2000, the index of small cap stocks, broke its all-time high of 868.57 in January and has subsequently moved over seven percent higher since then. Though the NASDAQ 100 index is still barely above half of its all-time high, it broke the 2500 level (a previous 10-year high) without hesitation over a year ago and has rarely traded below that since then.
In fact, if you were to adjust for dividends, the value of the Dow is actually following a pattern similar to these more risk-laded indexes which are composed of stocks that typically don’t pay dividends. Investors have long ago determined that the value of stocks in 2013 is greater than it was in most years previous.
Whether it be the combination of Quantitative Easing actions by the Fed and other central banks around the world (with some help from stimulus spending by the U.S. Government), or an aging population of investors seeking greater returns before entering a looming retirement, the market has declared that higher prices are acceptable. Thus they are likely here to stay even if it will take a while before the skeptics stop taking profit at this level.
Investors entering the market just now however should take caution and realize that greater fluctuation may occur as psychological barriers are overcome. Any investors making new entries would be prudent to allow for pullbacks in price along the way.
By Gordon Scott, CMT, Learning Markets Analyst