Dow 17,000: The Fourth of July Celebration Starts Early

On the last, abbreviated trading day of an already short week, the Dow Jones Industrial Average closed above 17,000 for the first time. How’s that for pre-Fourth of July fireworks?

REUTERS

The Dow Jones Industrial Average climbed 1.3% to 17,068.26 this week, the first time its closed above 17,000. The S&P 500, meanwhile, rose 1.2% to 1,985.44, its 25th record high of the year.

The Nasdaq Composite jumped 2% to 4,485.93, its highest close since March 31, 2000. Even the beleaguered small-company Russell 2000 isn’t so beleaguered anymore: It gained 1.6% to 1,208.15, just off its record high of 1,208.65 hit back in March.

Birinyi Associates’ Laszlo Birinyi and Kevin Pleines think the S&P 500 is heading higher:

The stock market has traded above our target of 1,970 and done so with some authority. We now view the market as having the wherewithal to trade to 2,100 within the next six months. While that would coincide with the beginning of 2015, several of our forecasts have surprised us with their intensity…

Commentators have distracted investors with concerns such as small stocks, VIX/complacency, utilities/sector movements which we have detailed as peripheral issues…Like most indicators they are descriptive, not indicative and there-fore have no further implications or information.

Sentiment, by our measures, is still unsupportive. We see more hedging in terms of market calls. The market is not climbing a wall of worry, rather it is climbing a wall of skepticism and misinformation.

Nor is the stock market looking all that expensive. The Dow Jones Industrial Average is now trading at 15.7 times the last 12-months of earnings, only slightly above its historical average of 15 times. The S&P 500, meanwhile, trades at 17.6 times trailing earnings, above its long term average of around 15.5, but not at a level that screams overvaluation. The folks at MRB Partners argue that stocks are especially attractive relative to bonds:

…based on the MRB Cyclically-Adjusted P/E Ratio, the earnings yield on stocks is nearly 6%, broadly in-line with the post-1990 average. By contrast, the real yield on G7 government bonds is close to 0%, resulting in a gap with equities that is wide by historical standards. As we discuss later, equity valuations are not compelling in absolute terms; ie. they are slightly above a neutral reading. Yet measured against significantly overvalued bonds, stocks are appealing at this stage of the economic cycle.

Much has been made of the Dow’s 153 trading-day journey from 16,000 to 17,000, the seventh-fastest 1000-point gain since the measure was launched. The folks Bespoke Investment Group note that it’s getting easier for the Dow Jones Industrial to break those big round numbers:

As you can see in the table, a 1,000 point move in the DJIA is not what it used to be. Back in the mid-1990s, when the DJIA was crossing 1,000 point thresholds at a fast clip, each of those moves required a sizable gain. With the law of large numbers kicking in these days, though, a 1,000 point move requires a rally of just 6%. And once the DJIA does close above 17,000, the road to 18,000 will require a gain of less than 6%.

Here’s the table Bespoke mentioned:

And after today’s close, that’s just 5.5% higher. Last one to 18,000 is a rotten egg.