Wow - talk about an overstatement

·         March 5, 2013, 4:44 PM ET

Dow’s New High Proves Bulls Were ‘Rational’

ByTomi Kilgore

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There may be plenty of “rational” reasons to expect a selloff, but that doesn’t mean investors should view the Dow’s rally to record highs as “irrational.”

Even if the Dow Jones Industrial Average appears to be acting a little too “exuberant,” as some might call it, the proof is in the price, and that price keeps rising to record highs.

In an evening speech on Dec. 5, 1996, after the Dow had run up nearly 70% in two years, former Federal Reserve Chairman Alan Greenspan didn’t actually say Wall Street was acting irrationally. In fact, he was just asking how could the Fed know when “irrational exuberance has unduly escalated asset values…?”

Based on the market’s reaction, the answer appeared to be that it can’t be known. Even if it could be, it doesn’t really matter for investors.

The Dow slumped 0.9% on Dec. 6, 1996, but recovered everything it lost, and then some, the very next session. And the Dow climbed more than 80% for a little over three years before finally peaking.

To paraphrase what renowned economist John Maynard Keynes has been attributed as saying, after a rough bout with the financial markets: The markets can remain irrational longer than rational investors can remain solvent.

When making important decisions, many will try to remove emotion and bias by making a list of the pros and cons, and then picking the side that is longer.

When judging the Dow’s outlook, there are a number of technical cons, including those mentioned in recent “Taking Stock” columns: Participation is declining, as the number of new 52-weeks highs on the NYSE are below where they were a couple months ago; some momentum indicators are diverging negatively, as they are still below their January highs; the 10-year Treasury yield, which has been relatively highly correlated with stocks, has fallen broken below a key uptrend line and its 50-day moving average, which many view as a short-term trend tracker; and so on.

Fundamentally: The unemployment rate remains at levels seen during the last recession, and is still a lot higher that what the Fed deems acceptable; Congress failed to reach a budget agreement in time to avoid automatic government spending cuts; taxes have increased and personal incomes in January suffered the biggest monthly drop in 20 years; the euro zone economy continues to show signs of contraction; etc., etc.

Meanwhile, some of the fundamental pros: The crucial housing market hasn’t fully recovered yet, but sales and pricing data indicate it’s heading in the right direction; high levels of share buybacks, dividend increases and acquisitions suggest the record amount of cash corporations had been hoarding is starting to come off the sidelines; and of course, the Fed is injecting massive amounts of liquidity into the financial system.

Technically, there’s only one thing that really matters: There’s nothing more bullish than a new high.

There are more pros out there, but there are also a lot more cons. But just on sheer numbers, a purely objective investor might choose the bearish side. But that doesn’t mean the bullish side is wrong. And even if it was, does it matter?

The Dow was up 137 points at 14264, or about 100 points above its previous all-time closing high. The Dow has rallied 14% off its Nov. 15, 2012, closing low.

There’s a old Wall Street trading axiom that many seem to forget: Investing isn’t about being right, or trying not to act irrationally, it’s about making money.

And so far, those who had picked the “pros” side have made money.

For more MarketBeat and other streaming markets coverage from The Wall Street Journal, point your mobile browser to wsj.com/marketspulse.

 

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