Dow could be in for letdown after 13,000

? Brendan Mcdermid / Reuters / REUTERS

Traders work on the floor of the New York Stock Exchange.

By Roland Jones

The Dow Jones industrial average has reclaimed the 13,000 spot -- a level it hasn?t seen since?the Bush administration was in charge and Lehman Bros.?was still doing business on Wall Street.

But don?t pop the Champagne corks just yet. Market analysts say 13,000 isn?t just a psychological level for investors, it could also prove to be a point of resistance for stock prices.

?There are a couple of things that bother me,? said Hugh Johnson, chief investment officer of Hugh Johnson Advisors in Albany, N.Y.

Johnson calculates that?from a market valuation perspective, stock market indices are about?8 percent higher than they?should be. And, ironically, growing optimism is another potentially negative indicator, he said in?an interview on CNBC.

?When there?s fairly widespread optimism and the market is overvalued you have to brace yourself for a little bit of a correction,? he said, adding that economic reports coming for February had ?better be good? or they could ?touch off a correction? in stock prices.

?So I am a little bit concerned, but all within the context of an ongoing bull market,? he said. ?Common sense says if we?ve moved up 20 percent since October, we should probably pay attention to that.?

A study by Schaeffer?s Investment Research is also cautious about the Dow hitting 13,000.

Schaeffer?s looked at how the Dow has performed on the 39 occasions it passed a 1,000-point increment and found that in the weeks following the event the Dow fell on average 0.4 percent and had a positive return less than half the time. By comparison, the Dow typically averages a gain of 0.28 percent over any two-week period and has a positive return more than half the time, according to?Schaeffer?s.

?The study shows you can see short-term weakness at these times because of the old adage of the market running on fear and greed. The market can get stalled at these big numbers because people get a bit too optimistic,? said Ryan Detrick, a market analyst at Schaeffer?s.

Longer term, Detrick is bullish about the market?s prospects. He points out that many investors have remained overly cautious as the overall market, as measured by the broad Standard & Poor?s 500-stock index, has rallied over 20 percent from its October low.

?We know many investors have missed out on this rally,? Detrick said. ?So we think that as the economy turns around more money will work in the system.?

Since 2007, investors have poured some $800 billion into the relative safety of bond funds while pulling some?$450 billion?out of equity mutual funds, according to the Investment Company Institute, a fund industry trade group.

?We?ve had the best start to the year for the market in decades, yet money is still going into bonds,? said?Detrick. ?That means a lot of money can come out of bonds and go into equities, once people realize they don?t need to be in this crisis mode. We think there is strong upside potential.?

Despite its recent rise, the Dow is still short of its all-time closing high of 14,164 seen in early October 2007. On the other hand, the index is nearly double its March 2009 post-crash low of 6,547.

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Source: http://bottomline.msnbc.msn.com/_news/2012/02/29/10531758-dow-could-be-in-for-letdown-after-crossing-13000-barrier

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