Monday, October 1, 2007

Dow 14000 - The Pros Sustain the Close

Today the Dow Jones Industrial Average closed above the psychologically important 14000 mark. The last time that this number was in the news, it marked the end of a rally in the stock market. This time, it looks like the 14000 level will mark the beginning of a rally, rather than the end of one. As I stated previously in Dow 14000 - The High Water Mark?:

...when a market average such as the Dow passes through 12000, and then 13000, confidence and buying momentum build. And when the next much heralded number, 14000, becomes a barrier that the market can reach, but that the Dow average cannot close above, then that is a worrisome sign for the stock market.

The last time that the Dow average crossed the 14000 line, it closed below that number as traders rejected the new valuation for the 30 Dow stocks. Today, the Dow charged through the 14000 mark on high volume and closed above this number for the first time ever, providing a buying signal as strong as the sell signal that was provided by the rejection of this level last July.

And while we are taking a stroll down the (admittedly short) memory lane of previous columns posted to this blog, I should mention that the "festival of falling knives" that caused so many investors so much pain between the end of July and mid-September appears to be over. Only 40 companies had their shares hit new record low prices for last 52 weeks today, well down from the record of 1,107 new low prices which was set on August 16, 2007.

Certainly, investors have plenty to worry about, from fears of recession to the uncertainty that comes with a prededential election on the horizon, but for the moment we can take solace from a Federal Reserve that is apparently more eager to avoid a recession than to support the dollar or to contain inflation, and from a stock market which is rebounding from a substantial correction. Now is a good time to buy rationally priced assets, using the screen that I described in Avoiding the Pitfalls of Growth Investing, parts I and II, especially if you are investing with a time horizon of a year or more.

In my next column, I will discuss the reasons why you should hold your stocks for over a year, and why the shares of General Electric and Johnson and Johnson look so inviting at the moment.

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