The summer rally kicked off last week. Oh, what a glorious kickoff it was.
By Friday, the S&P 500, which had been sitting in the same place as it was in January, gained 6% on the week. It was the biggest one-week gain in two years. And it prompted at least one popular television talking head to declare, “If we can do this every week for the rest of the year, the S&P 500 could double by Christmas.”[ad#Google Adsense 336×280-IA]That’s it, folks. It’s all upside from here.
Everybody into the pool. The water’s warm. Those pesky little piranhas nipping at your toes a couple weeks ago swam away.
I, too, am leaning bullish right now. While I don’t expect stocks to double this year, the market is poised for further gains. In fact, following a short-term pullback to relieve the current overbought conditions, I think the S&P 500 could make a new 52-week high – above 1,355 – sometime this month.
There’s just one tiny, little problem… This is 1987 all over again.
I hate to keep harping on it. But the action is just too similar to ignore.
In 1987, stocks charged out of the gate and put up solid numbers for the first four months of the year. The market gave up much of those gains, however, during a seven-week springtime correction. Stocks then went on to make new highs in August.
All the while, investor sentiment flopped back and forth like a bipolar fish out of water.
The most glaring similarity between 1987 and today remains the interest-rate environment. Rising interest rates are bad for stock prices. When the return on a “risk free” Treasury obligation meets or exceeds the potential return on stocks, it spells trouble for the market.
In 1987, that trouble turned into a crash.
Please take a moment and reread my previous essay on this topic. While many investors and analysts are staring at last week’s spike higher in stock prices and anticipating larger gains to come, they’re ignoring this…
Look at that one-week spike higher in the yield on the 30-year Treasury bond. Rates jumped from 4.175% to over 4.4% (44 on the chart).
Most of Wall Street still expects the S&P 500 to end the year somewhere between 1,350 and 1,400. The midpoint of that range is 1,375 – about 2.5% higher than Friday’s closing price. That’s a gain of 5% on an annualized basis.
Investors looking to put money to work today can choose between putting money into stocks with a potential 5% return or into Treasury bonds at 4.4%. As stocks and interest rates move higher – and I suspect they both will over the next month or two – interest rates on long-term Treasury bonds will exceed the potential rewards of the stock market.
That’s what happened in 1987 – just before the stock market crashed.
Beware… it can happen again.
Best regards and good trading,
— Jeff Clark[ad#jack p.s.]
Source: The Growth Stock Wire