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Yesterday saw a new record close on the Dow Jones Industrial Average and a renewal of the panic buying we saw earlier in the year. While it is great to see that the Dow has retraced all of the losses from the 2008 decline I am concerned about what message will be directed towards individual investors. The asset allocation/buy and hold crowd will use this milestone to “prove” that markets always come back so that their approach is still valid. This is true, but it ignores the fact that it took the market almost 6 years to come back and the lost opportunity cost associated with that.
Our momentum indicators are still extremely bullish on the stock market. Our positive reading on stocks does not mean that the market is guaranteed to rise from here. There are still many risks on the horizon (Poor corporate earnings, problems in Europe, slowing economy, partisan bickering in Washington, etc) that could cause a selloff. However, our research suggests that when our momentum indicators are bullish the rewards of being invested outweigh the risks.