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New Highs

March 13, 2013 – 5:06 pm

stock_charts_250x251When the popular press becomes exuberant about the stock market reaching new highs, and for this discussion it is concerning the Dow 30, it tends to make professionals nervous. The stock market is emotionally driven in the short term so when the drum of excitement beats strongest and everyone is dancing to its tune the older more experienced part of the investment community begins to wonder when the dancers will become exhausted. In other words, when will the market reverse, at least in the short term, and when will it become overvalued in the long term.

While it is a big concern that we have not had a health restoring pullback in stock prices in months, and we all know that is not the norm, the old sages that tend not to join in the frenetic dancing of ever increasing stock prices are looking to valuations and growth. The P/E ratio of the S&P 500 is not out of line. In fact in historical terms it is a little on the low side as it closed at the end of February at 14.4 times earnings. Also with low inflation and interest rates, a P/E at 14.4 might be considered significantly low as the housing sector recovers and the economy looks to expand 2% or more in 2013.

Still, what if the growth rate does not pick up, or more likely what if the Fed begins to raise interest rates? In fact it is not ‘what if’ they do it but ‘when’ will they do it.

For the time being enjoy the rising market, but all things end and this too shall pass. It just might not be soon and even a correction might be welcomed not feared. Expect a correction but not a bear market, that is, not yet.

Good Trading
Steve Peasley

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