Why US Stocks Can Move Much Higher – Part One, Overview

It is our conclusion that stocks can move much higher during 2007.  This is no surprise to regular readers of "A Dash", but it is a good time to summarize the current situation.  We will do this in a multi-part series examining several issues.

This installment considers an overview of basic considerations.

Psychology and Sentiment

Over the last few weeks we have noted a changed attitude among many active traders and fund managers who state public positions.  We started to note these, planning to cite links, but decided against it.  It is so pervasive that it seems unnecessary.  Everyone is "taking something off the table" and trying to lock in gains, nervous about the seemingly relentless advance.

The TickerSense blogger sentiment poll captures this quite well,  with over 40% bears and 25% neutral.  It seems unusual for bearishness to be rising with the market.

One reason is that the bullish forecasters are seeing the market approach their original expectations  for the year.  Revisions to forecasts are modest.  Abby Joseph Cohen is going to 1600  on the  S&P for  2007.  That puts her on the bullish extreme, but it is only about 6%.  Ed Keon, whom we have cited in the past for his excellent analysis of market factors, remains the biggest bull with his forecast going to 1650.

Meanwhile, there are plenty of forecasts of a major blow for stocks.  Traders are reacting to perceived risk and reward.  That is how psychology works.

There is a lot of rhetoric about a "melt-up" or "ignoring the fundamentals."  Since we believe in analysis rather than rhetoric, it is necessary to look at technical and fundamental considerations.

Technical Indicators

Before accepting the "melt-up" talk, it is useful to look at a chart.  We recommend today’s excellent analysis by TraderMike.   We  see in his charts some  strong trending markets, but nothing  parabolic.  Many active traders follow Worden, where today’s  indicators show uptrends in every time frame they follow (subscription required).

Some technicians report "overbought" conditions.  It would take a very small pull back to relieve these overbought readings.  Moreover, overbought trending markets can move higher — much higher.

Most importantly, our own technical models, devised by Vince Castelli, caught the end of last year and the current move.  They remain bullish on all of the major indices, a position that (unlike many others) we have reported contemporaneously on TickerSense.


Some assert that the market has gotten ahead of fundamentals, since stocks have advanced more than recent earnings growth.  These analysts are focused on what we call "local efficiency."  They are assuming that last year’s pricing was an accurate valuation.

In fact, stocks have lagged during a multi-year period where profits grew at double-digit rates.

There is a lot of catching up to do.

Our own preview of 2007 informed investors that market valuations were low when one took the current low interest rates into consideration.  Those who ignore interest rates in their analysis of  fundamentals are adopting a method that we find distinctly inferior.

We have explained why this is true.  Articles in this series will show how it is playing out before our eyes.


There are also plenty of miscellaneous arguments lacking evidence.  Our favorite radio commentators on Car Talk have a term for such claims concerning car repairs.  They call them "BOGUSSSSS".  We will try to identify and discuss several instances including the following:

  • "Peak" earnings
  • Ignoring interest rates
  • The market record of umpteen up days and the need for balance
  • Stock buybacks as "inferior" earnings
  • Poor recession forecasting
  • Earnings mean reversion

Our work is laid out and our position is clear.  Obviously, the stock market can decline at any time for many different reasons.  Our technical models can change our trading positions, and we shall report if that happens.

These would be short-term factors.  Our fundamental conclusion is that stocks have plenty of room to run.  We remain leveraged up in trading accounts and close to full investment in individual accounts.

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  • Ward May 10, 2007  

    Robert Shiller spoke at CFA conf last week and among his many slides was a chart of real earnings and real price since ’85. Headline reads “why did the stock market rebound so strongly since ’03” but the chart very clearly shows how the big move in earnings from ’92 to ’00 was follwed by an even bigger gain in price – the bubble. This time around eps have run much farther and much faster and price has moved about half as much. A bullish chart from a famous bear.

  • Nova Law May 10, 2007  

    Your post is an excellent example of truly contrarian thinking. Do you believe P/E ratios drive the forward returns of the stock market, as the Mauldin/Easterling crowd proclaims?

  • Jeff Miller May 10, 2007  

    Ward and Nova — Thanks for your helpful comments. The Shiller analysis is interesting, since his long-term look at forward earnings uses a rather awkward estimate for historical analysis.
    I read all of the Mauldin articles. As you might well conclude from prior material, I see P/E without looking at interest rates as a weak method. More on that later.
    Thanks again,

  • theroxylandr May 10, 2007  

    Yes, the stocks can go another 20% up this year. They can also go down 20% with no less probability (remember, we are living in the biggest credit bubble since 1929).

  • Marc May 11, 2007  

    I keep hearing the comments about the bearish sentiment being too high and thus indicative that the market has further to rise. Does it make any sense to quote bearish sentiment (from any sources) when the true measure of sentiment is the market itself, which is obviously going up up up? This tells me that the real sentiment is almost obscenely bullish.

  • Jeff Miller May 11, 2007  

    Marc – Thanks for your observation. That the market has moved higher does not necessarily imply irrational exuberance. It all depends on the underlying value. Check out the following:
    My own experience is that markets often go up, up up while fighting plenty of worries.
    Thanks again,