Stocks have seen their highs for the year.
The market has had a respectable run-up, buoyed by healthy corporate profits. But over the past few days, it has become overburdened with a long list of reasons why it should slide: higher interest rates, spiking inflation, lofty energy prices, slackening housing demand, the widening trade deficit, pricey commodities, bloated government debt levels, tapped-out consumers, even the advent of another costly hurricane season and (write your favorite devastation here).
Whenever the Dow Jones industrial average flirts with new highs, as we saw May 10, there’s a tendency for investors to sell and secure profits. Fewer investors buy and hold these days. The investment world is increasingly dominated by short-term traders and hedge-fund managers in search of a quick killing.
“There’s so much more fast money in the market that whenever you get a fast run-up, you are going to get a fairly fast pullback,” said Ted Henderson of Stifel, Nicolaus & Co. in Denver.
On May 10, the Dow hit 11,642, which is roughly 80 points shy of its all-time high of 11,723.
That record came in January 2000 when a nation of day traders dreamed of a 20,000 Dow. I predict the Dow won’t eclipse 11,723 this year.
The Dow ended 2005 at 10,717. It showed an 8.6 percent gain on its recent high of May 10.
Sam Jones, a money manager at R.E. Jones & Co. in Denver, said he believes the Dow is near its bottom for the moment. He predicts another rally between now and July, and then another steep plunge, possibly to below 10,000. From there, he predicts the Dow will recover, ending the year with a gain but not surpassing its all-time high until next year.
Sounds like a whole lot of nothing to me.
“It’s the old adage ‘Sell in May and go away,”‘ said John Claxton, a vice president at RBC Dain Rauscher Inc. in Denver. “We’re entering what is historically the four poorest months for the stock market.”
I’m a fan of using clichés to predict the market. The reasons they are called clichés is because people say them a lot. And the reason people say them a lot is because they are generally true, like “Never try to catch a falling knife.”
I’m also fond of the Wall Street term “dead-cat bounce.” If a cat falls from a 50-story building, it will probably rebound from the sidewalk, but don’t try to catch it because it’s probably gooey.
I witnessed this phenomenon writing about Boston Market stock as the restaurateur flew into bankruptcy in the late 1990s. But that was not a pure dead-cat bounce since it involved chickens.
If history is any guide, the Dow will be flat to down between now and September. Typically, the market begins with a January rally that fizzles by spring and doesn’t pick up again until September. What we’re seeing now is another manifestation of that trend.
Albert Woodward Jr., of Greenwood Village-based Woodward Wealth Management, predicts stocks will finish the year with a 10 percent gain and isn’t worried about the dicey months ahead.
“This is just the stock market taking a break,” he said. “If you are a trader and you were smart enough, you made yourself a nice profit already. If you’re an investor, you take the long view and have a nice summer.”
Fred Taylor, a money manager with Northstar Investment Advisors in Denver, notes that while the stock market remains uncertain in the months ahead, money-market-account holders are profiting from rising interest rates.
“As an individual investor, you don’t have to do anything and you can make 4.5 percent, with no risk, in a money-market fund,” he said. “This is where a lot of people are going to park their cash.”
When people start parking their cash, the Dow can’t be driven to new highs.
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-820-1967 or alewis@denverpost.com.
