The professional Wall Street spin machine has kicked into overdrive in the past two weeks. A slew of strategists have stridden into the teeth of Hurricane October with forecasts saying stocks in the final three months of this year will clock in with a juicy 8% gain -- equal to the average fourth-quarter gain over the past decade. As you might expect, there is plenty of bearish dissent, and the doomsayers certainly appear to have the upper hand of late. But more remarkable, perhaps, is a growing minority of forecasters who are looking for much, much better results. Louis Navellier, the fund manager and newsletter publisher, is typical of the mega-bulls, advising private clients over the past weekend that their "best buying opportunity in six months" was last Friday. "If you have any cash, invest it right now," he wrote. "The next few weeks will be phenomenal." More objectively, the quantitative team at Thomson Financial put out a note on Monday stating that their Market Model Risk Premium -- which gauges the extent to which investors are so worried about the future that they are overpaying for the safety of government bonds -- has risen to a record level that tied a mark set in September 2002. That was, as the Thomson research team pointed out, an "excellent buying opportunity."
The Dow at 40,000?Yet even these sound like doomsday scenarios compared with a cadre of analysts who argue that stocks are actually on the verge of a historic breakout. They say their calculations suggest the Dow Jones Industrial Average, now at 10,200, will rocket to 20,000 to 40,000 over the next three to five years, driven by improving global income levels, a boost in the money supply and the deployment of vast quantities of hoarded cash by companies and individuals.
A Pattern Emerges, AgainA key element of both the Dent and Hays outlook is the observation that most extreme bull phases of the last century -- 1915 to 1919, 1925 to 1929, 1935 to 1937, 1985 to 1987 and 1995 to 1999 -- were preceded by major corrections (or crashes), followed by a strong initial recovery and then a one-to-two-year trading range. Of course, the implication is that the crash in this case was the 2000-02 bear market and that the recovery rally happened in 2003 and the trading range was seen from 2004 to 2005. Dent suggests that the markets "are simply waiting for signs that the Fed can't tighten much further" and for oil to correct below $58-to-$62 support levels "to suggest a top in that bubble."
Riding the Next BullIndeed, considering the walking wounded in the Dow, it's impressive that the index is only trading about 12% down from its all-time peak of 11,698, set in late 1999. You can certainly see that if oil prices moderated and investor mood began to lift, the venerable measure of the market could certainly approach and exceed its old highs while its sleepier components were just barely getting off the floor. After that, it wouldn't exactly take much imagination to see a 50% move up to 15,000, as it would only require an advance in a stock like Intel, for instance, to $34.50 from its current perch around $23. It was there as recently as November 2003. Merck would only have to get to $38.77, where it traded only a year ago. If the optimists' vision were to come into play, it would take a lot of investors off guard. Possibly the best way to guard against the chance that the Dow might take off without you would be to devote 5% to 10% of your funds, let's say, to a portfolio containing Dow industrials, transports and utilities that are considered the most favorable today under our StockScouter system. That way, you're probably going to be in great shape for a bull run, and you're unlikely to get badly hurt -- at least on a relative basis -- if bears gain firm control instead. The last time I put together a similar list was Feb. 4, in a column titled "
|The StockScouter Dow 15 |
|Name||DJ Index||SS rating||10/10 Close||YTD Chg.||% Chg. 5y high|
|Home Depot||DJ Industrials||8||$38.02||-11.6||-46%|
|Wal-Mart Stores||DJ Industrials||8||44.54||-16.6||-35|
|Exxon Mobil||DJ Industrials||9||58.50||16.3||-11|
|United Technologies||DJ Industrials||8||50.00||-3||-8|
|Burlington Northern Santa Fe||DJ Transports||9||58.51||24.5||-3|
|CenterPoint Energy||DJ Utilities||8||13.65||22.9||-73|
|Dominion Resources||DJ Utilities||8||78.85||18.8||-9|
|Source: MSN Money|