Wednesday, March 13, 2013

Can This Really Happen?

Just a month ago it was very easy for me to assume the most likely scenario due to my bias. But a very close look at a long-term chart, combined with realization of rapidly changing data, persuaded me to stifle my stubborn skepticism and reconsider my stance towards the stock market.

I will use Dow Jones Industrials weekly chart for this example. At 14,198 it looked like a double top would be in place, which would result in a nasty sell-off. I was leaning that way and thought that inevitable correction was coming. Well, the price is king, and it is telling me that I was wrong. While a simple backtest of the breakout could still occur, it is going to be well-supported and should result in further rally. It is very easy to get bullish when the price is going up. As the matter of fact, I am scared of being bullish up here, when many other market players are also bullish, and very few bears are left. It feels as if I am scared of heights, because this territory of all-time highs is unprecedented. So to calm myself down and build a likely scenario, I went back to the prior time when a double top was blown through in 2006. I am not saying that this is the only way things will transpire from here, but I think that it is one of the most likely scenarios, due to Fed not exiting until the end of 2014 (based on unemployment projections). A bear market in stocks will probably begin when Fed is done, but it may be almost two years from now. This ultra bullish case takes Dow Jones Industrials to 18,600 by the end of 2014 (with four corrections on the way). Based on equal percentage calculation S&P 500 target would be 2,018.

Now, most of you will probably think that this is crazy. But I say that crazier things have happened. After all, this may be the super bull scenario I was looking for, and stock market gains of 22% and 16% per annum have certainly been achieved before.

click on chart to enlarge

1 comment:

  1. Those targets certainly not crazy.

    So long as the Fed print..and I'm guessing at least to spring/summer 2014, the market will keep going up.

    It probably is that simple.