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Why I'm Sticking By Dow 55,000

>>5 Big Stocks to Trade for Big Gains

So no, Dow 55,000 isn't a target that we'll see get taken out in 2014, but from a long-term view, the 55,000 level on the Dow isn't unrealistic even if it feels unattainable right now. We've hit similar market growth in both of the similar periods in years past.

From a technical standpoint, the broad market is breaking out of a long-term base that couldn't be much clearer. A year ago, when I first put that sky-high target on stock prices, we weren't at new highs yet. Now that indices have hit a new high water mark in 2013, we've got far more confirmation that we're coming up on another rally leg.

The extremely long-term chart of the Dow Jones Industrial Average below does a good job of showing off the similarities between the rallies that started in the 1940s, the 1980s, and today:

Each of the previous multi-decade consolidations in the Dow has taken on a very similar structure. And after breaking out through resistance, stock prices never looked back.

The Fundamental Factors

From a fundamental standpoint, a prolonged rally in stocks doesn't really make sense. After all, stocks have moved too far too fast from the 2009 bottom, right? Now they're looking expensive again.

But that's not exactly accurate.

As I write, the Dow sports a price-to-earnings ratio of 16.8. It was 16.2 in the last five years of the 1930s and just over 10 in the last five years of the 1970s. (For comparison, the high inflation of the 1970s warrants that P/E discount versus the 1930s and now.) The point is that transformational earnings growth isn't something that's visible at this stage in the cycle yet.

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There is a big difference today, however. In 2013, corporate profitability and cash holdings have hit all-time highs, which means that around 25% of major stock index value actually comes from cold hard cash.

We've never seen liquid assets make up so much of stocks' assets before -- and that means that P/E ratios are very much overstated. Stocks are actually much cheaper than they appear.
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Chart of I:DJI
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