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article imageDow Jones breaks through 26,000 but ends lower January 16

By Ken Hanly     Jan 17, 2018 in Business
New York - Just in the past seven trading days, the Dow Jones Industrial Average (DJIA) rose from 25,000 all the way to over 26,000 for a brief period on January 16 but gave back all its gains and ended up below its open at the close.
Is the market ready for a fall?
The rapid rise in the Dow is giving rise to fears by some that the market is overheating. According to an article in USA Today some investors worry the the market may be entering a "euphoria phase" a stage that typically marks the final stage of a bull market.
This stage of the market is said to involve not just higher share prices but rising investor optimism as well as fresh cash coming into the market from those who fear missing out on the rising prices even though the market has very high prices. This stage can stretch out the bull market for some time. However, the fact that the market closed lower could indicate that it is ready to turn down. We shall see.
Final stages of a bull market can last years!
In December 1996 then chair of the Federal Reserve Alan Greenspan warned investors about their "irrational exuberance". However the market did not reach its peak until March 2000 more than 3 years later.
Chris Zaccarelli, of the Independent Advisor Alliance in Charlotte North Carolina said: "We're in the latter stages of this bull market, but the final stage could last another two or three years given the length of the run so far."
Closing values for three main stock indices Jan. 16
According to money.cnn the Dow Jones (DJIA) closed down 0.04 percent, 10.33 points at 25,792.86. The Nasdaq index was down a bit more at 0.51 percent at 7,224.00, a loss of 37.06. The S & P was unchanged at 2,776.42.
UPDATE: DJIA is up over $26,000 again on January 17th. Was over 26,050 when I last looked.
Causes of recent rises in stock prices
Trump's recent tax cuts promise to increase the profits of most US companies and also the temporary cuts for individuals may stimulate demand.
The global economy is also growing as is the US economy. A recession would be a sure bull market killer but there is no sign of that happening soon. US GDP growth is expected to claw its way back to around 3 percent this year.
However Zaccarelli warns:"The speed at which the market has moved higher in the past two weeks is unsettling and the risk of overheating this year is rising. The more expensive the market gets, arguably the more risky it becomes." Zaccarelli says he would not be surprised to see a 7 to 12 percent decline in the market some time this year.
Signs of optimism in the market
In the last week alone, new cash to the tune of $24.4 billion flowed into stock funds. According to the Bank of America Merill Lynch this is a record and a "blockbuster".
Investors who have been on the sidelines for most of the recent 9-year bull run are now optimistic it would seem. Just last week, the number of optimistic investors rose to 60 percent the highest number in 7 years.
Fund managers are almost fully invested with just 4.4 percent of funds in cash in January, a five year low. Hedge funds also recently increased stock market exposure to the highest level since 2006 according to Bank of America data.
Earnings forecasts boosted
According to Bespoke Investment Group analysts are boosting their forecasts of US company earnings at the fastest pace in the last decade.
In the S & P 500 stock index, analysts expect first quarter profits of firms to grow by 15.3 percent, up from just 12.2 percent at the beginning of the year. For the final three quarters of this year earnings growth is expected to be close to 15 percent.
However, Brad McMillan of the Commonwealth Financial Network warned that the market was showing too much exuberance and that this could be dangerous. Edward Yardeni of of Yardeni Research who predicts the market will rise by 16 percent by the end of the year worried that the market could reach that target months ahead of schedule.
Yardeni warned: "No one is getting in early here. And there's a good chance they are getting in late."
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