The DOW broke through the psychologically important 14,000 mark Friday, the first time it has traded at this level since before the economic crisis. The last time the DOW crossed the 14,000 mark was on October 17, 2007. It has only managed to do so 15 times ever, so it is a milestone event.
It is nice to see the DOW breaking through 14,000; but if history is any indicator, it will probably not last all that long. Today's move is being fueled by strong auto sales figures and a good jobs report, but the overall trend higher has been a result of small investors deciding to jump back into the market.
As encouraging as it may be to see improving investor sentiment, the harsh reality is that by the time average investors turns bullish on the broader market the rally is close to ending. We are seeing a lot of “following the herd” taking place, and contrarians will be quick to point out that the last place you want to find yourself is behind the herd.
We also have to remember that the DOW is made up of just 30 companies. Yes, they are large companies, but still just 30 companies. A better way to gauge the overall market is with the S&P 500 since it is made up of 500 different companies.
The S&P 500 is currently trading at 1,513, and if you look at an all time chart on it, you will notice that it has been in this territory on two different occasions, once in the summer of 2007, and once in 2000 before the dot-com bubble burst.
In both case we saw quick and dramatic sell offs. Once again, things were different then. The internet bubble, and then the recession, led to those sell offs but the same could happen again. Perhaps a European meltdown is around the corner, or perhaps the U.S. economy falls into another recession… hindsight is always 20/20, but seeing into the future is impossible.
One thing is for sure, with the markets at their current levels I would not be willing to make too big of a bet that we can continue to head higher.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va. His articles typically cover big-picture events and forecasting what impact they will have on the stock market. In addition to writing for Fresh Brewed Media, Michael also wrote for AOL's BloggingStocks for three years, focusing most of his attention on the energy and technology sectors. Follow him on Twitter at @MFatMICenter.