Market's Stratospheric Heights Bring Dangers
By Rev Shark
RealMoney.com Contributor
4/30/2007 8:38 AM EDT
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"If everyone is thinking alike then somebody isn't thinking.:
-- George S. Patton
Most everyone is aware of the challenges facing the U.S. economy. First-quarter gross domestic product growth of just 1.3%, a weak dollar, inflationary pressures and a struggling housing market are all painfully obvious. Everyone is also quite aware of the unusual strength of the major market indices. In fact, the DJIA isn't just unusually strong; it is on the brink of a record-setting streak of positive days.
The end product is an unusual market that is hitting all-time highs while sentiment remains relatively sedate. The fact that the market has been led by a narrow group of big-cap stocks while breadth has been negative at times makes things even more confusing and difficult.
So what happens from here?
The traditional wisdom is that the market will continue to climb higher because we have much skepticism and doubt, which assures us that there is a big reserve of cash on the sidelines to support things. Those folks who have missed out will buy dips and/or will give in and do some buying as the market refuses to rest.
The question many are contemplating is whether the fact that the market has chosen to ignore so many economic worries and concerns will eventually eventual lead to a reversal once something occurs to shift the focus to the economy. The market is doing well right now by focusing on earnings and the fact that we have very strong momentum. The economy has been ignored and as long as stocks are going up that seems the smart thing to do.
The big danger for the market is that momentum will start to cool and the focus will shift to economic concerns and away from the strong earnings reports that we have enjoyed. With so many profits being racked up in parabolic fashion, the selloffs can be quite swift is there is a rush to protect gains.
For now, market players simply don't care about the economy. They are focused on earnings, which have been downright stellar. But earnings are coming to an end as we enter a seasonally weak time for the market that begins in May. With the indices overbought but plenty of folks not trusting the market, the conditions are ripe for some sharp profit-taking.
Of course, the big question is what might trigger that. If you have been anticipating that, you have likely been suffering some pain as the indices steadily roll higher. The problem is that when some selling does kick in, those who have been riding the wave higher may accelerate it.
We have a mildly positive open again this morning as merger and acquisition news boast European stocks. The wires this morning are rather quiet but we have some economic data coming up. Oil is down slightly this morning after a big gain on Friday and gold continue to trade higher.
