Stocks were flat Wednesday morning, a day after the Dow closed above 13,000 for the first time since May 2008, the S&P had its highest close since June 2008 and the Nasdaq reached heights unseen since December 2000.
In the spring of 2008, you may recall, the market was in rally mode following the Fed-engineered takeunder of Bear Stearns by JP Morgan in March of that year. Many traders viewed the deal as the sign the crisis was over when, of course, things would get much, much worse. With the ECB announcing results of its latest emergency lending facility, Goldman Sachs and Wells Fargo getting Wells Notices from the SEC over mortgage-backed securities deals done during the boom, and Morgan Stanley facing a downgrade from Moody's, it's clear the echoes of the crisis have not yet been silenced. Still, the stock market has come a long way (baby) from those dark days.
Now that stocks are back to pre-crisis levels, thanks to a rally that has seen major averages have more than doubled since the lows of March 2009, the key question for investors is: What's next?
For those investors smart, savvy and lucky enough to get on board in the early stages of this advance, my advice would be to take some profits -- if you haven't already. Remember the old market saw: Bulls make money, bears make money, pigs get slaughtered.
As for the rest of us (a.k.a. the majority of investors), history suggests it's not too late to get on board for the following reasons:
Emotions in Motion: Performance anxiety is a very powerful force on Wall Street. Many professional money managers who've been on the sidelines or actively betting against the market face intense pressure to get long or lose their jobs. Bullish sentiment has risen for both professional and retail investors, but remains below levels typically associated with market peaks, judging by Citigroup's Panic/Euphoria Model among other metrics.
It's a Relative Game: Compared with bonds and certainly cash, stocks look very attractive. The S&P 500 sports a dividend yield of 2.1%, which is low historically but above rates on 10-year Treasuries. In addition to potential price appreciation, stocks offer some shelter if interest rates rise, certainly more than bonds. As my Breakout colleagues report, it's rare for the S&P's dividend yield to be above the 10-year yield, occurring only 20 times since 1953; more importantly, it's delivered a positive 1-year return for stocks 80% of the time, with an average gain of 20%, according to S&P Capital IQ's chief investment strategist Sam Stovall.
In addition, announced stock buybacks for 2012 have already eclipsed $1 trillion, which uber-bull James Altucher says is "the most important number" to determine where the market is heading. "This market is like any other since 5000 B.C. — supply and demand will rule prices," he tells The Daily Ticker. "In any situation in the universe, when supply goes down and demand goes up, price goes up." (See: The Dow Is Going To 20,000 Within A Year)
Of course, there are a lot of things that can go wrong. Europe remains a basket case and tensions between the West and Iran are uncomfortable high. The U.S. economy could stumble again as gas prices crimp consumer spending and scuttle a fragile recover. (See: U.S. Economy "As Good As It's Going to Get": Economist Sees Spring Slump)
Plus, stocks being cheap relative to Treasuries is not the same as stocks being absolutely cheap. Based on Robert Shiller's cyclically adjusted P/E ratio, the S&P 500 is trading with a P/E around 21, above its historic average in the mid-teens, making stocks at least slightly overvalued on this metric.
But markets tend to overshoot "fair value" both on the upside and the downside, and it's hard to argue the stock market has reached "irrational" levels — at least not yet.