How Long Will the "Miracle on Wall Street" Continue?

By Moe Zulfiqar

As the key stock indices are going higher, there’s a growing concern among investors that we are reaching a top. There’s a significant amount of noise that says the key stock indices are running on nothing but free money and the fundamentals that drive them higher are dead. We’re hearing that it’s all going to fall soon.

To some degree, I agree that easy money has a hand in the rise of key stock indices, and that current corporate earnings aren’t all that impressive. However, while observing the markets over time, I have learned that tops and bottoms are not easy to predict; in fact, it’s impossible. That’s because it isn’t clear when they happen and they can only be identified once they have been made.

Going back to 2009—when the key stock indices weren’t in such good graces—there was a significant amount of noise saying they were going much lower. At that time, the bottom was placed in, but it didn’t become clear until later. In 2007, the key stock indices made a top, but it wasn’t apparent until they started to slide lower.

Investors who think the key stock indices are about to form a top, or have already formed one, have to be really careful in their predictions. If they believe their convictions are going to be correct, then they should go in with stops, in case the trade works against them.

Going forward in December, here’s what else investors need to know.

December is generally a quiet month on the key stock indices. For example, the average return on the S&P 500 in December from 1970 to 2012 was 1.79%. The maximum return was 11.07% in 1991, while the smallest return was negative 6.03% in 2002. (Source: “Past Data,” Stockcharts.com, last accessed November 27, 2013.)

Mind you, the average return is based on past information, and shouldn’t be taken as cold, hard fact indicating where the key stock indices will be heading for the month.

On the fundamentals front, investors have to keep few factors in mind going forward.

The third quarter was interesting when it comes to corporate earnings. For example, the corporate earnings growth rate for S&P 500 companies was 3.4%, based on 486 S&P 500 companies that have reported as of November 22. I also found that 73% of the S&P 500 companies that reported were able to beat the corporate earnings estimated by the analysts. Sadly, only 52% of the S&P 500 companies were able to beat the revenue expectations—are they not selling as much? (Source: “Earnings Insight,” FactSet web site, November 22, 2013.)

We have also learned that there weren’t many changes in the U.S. economy; the unemployment rate has stayed very similar and the jobs growth has been in low-wage-paying sectors. This means that consumer spending, which drives the U.S. economy forward, might be in trouble.

At this point, irrationality might continue to prevail in the key stock indices, which may continue to increase. If this becomes the case, then investors may be able to profit from securities that track the key stock indices. One example would be the SPDR Dow Jones Industrial AverageDIA. This exchange-traded fund tracks the performance of the Dow Jones Industrial Average.

This article How Long Will the “Miracle on Wall Street” Continue? was originally published at Daily Gains Letter