There’s no denying the tremendous performance of domestic equities in the first quarter of 2012. The Dow surged some 8% during Q1, but that jump was small potatoes when compared to the 12% gain in the S&P 500 and the whopping 19% spike in the NASDAQ Composite. These gains are impressive even during boom times, but considering they’ve come in the face of weak economic fundamentals, more debt woes in Europe, and a slowing Chinese economy, the gains through the first three months of the year have been truly impressive.
Today, I’ve read several stories about Wall Street analysts that remain wildly bullish on the domestic equity market. Some stories have claimed we have a lot more room to run, and that stocks could soar another 30-40% this year. According to one analyst, the Fed’s low interest rate policy has made traditionally less risky assets much more risky than investing in stocks. He thinks the lack of yield on cash and bonds will drive more money out of these assets and into stocks. In turn, he predicts much more equity buying.
We now are seeing stocks fall below 1,400 on the S&P 500. The 1,400 level is important, since the S&P has been trading around that mark for the past several weeks. I think the next big test for this bull will be earnings. Over the next several weeks, we’re going to get a sense of how companies did during Q1 2012. If the top and bottom lines are strong, and especially if corporate outlooks look promising, we could see more buying.
On the other hand, failure to meet expectations and/or muted outlooks by corporations for the remainder of the year really could cause a rapid sell-off that you won’t want to get caught in.
I continue advising readers of my Successful Investing advisory service to approach this market with extreme caution, and not to get caught in a bull trap.