"This time, itwill be different."
This phrase is perhaps the most overused and dangerous phrase
in the world of finance. It usually means to get ready for a
repeat of the same oldmarket pattern or occurrence.
As an example, I remember back during the dot-com boom, many
investors believed thestock market was going to continue skyward
forever. They pointed to things like the unlimited potential of
the Internet, the new economic paradigm and a variety of
otherfactors that supported their bullishness. Well, despite the
ragingbullish fever and the "new" reasons for why it would never
end, we all know what happened. The dot-com bubble burst in the
same fashion as all other speculative bubbles during human
Thisyear , we have experienced a hugebull market . Many
pundits are calling for the bullish move to end in a sharp
downwardcorrection . Thesebearish prognosticatorsnote thatstocks
usually drop during the months of August through October. In
addition, they say the stock market isovervalued , citing
technical patterns like the "triple top" tosupport their
The bears have a case, historically and cyclically. But I am
going to go out on a limb and say things are really different
Based on my research, there will not be a sharp pullback this
autumn in the U.S. stock market. The selling has already
happened, and I expectupside for the rest of the year. While this
upside may be lackluster, I am convinced any additionaldownside
will be quickly bought, thus preventing any steep
Here's why things are different this time:
|1.Monetary policy will remain accommodative for some
This year'srally has been driven by accommodative monetary
policy. Every dip like the one we experienced this month
has been triggered by fears that the Federal Reserve may be
changing its stance.
Fed ChairmanBen Bernanke has warned that "the premature
removal of accommodation could, by slowing theeconomy ,
perversely serve to extend the period of long-term rates."
This makes it clearthe Fed will likely continue with its
quantitative easingbond purchases into next year. The
recent drop in stock prices hasput fear into the minds of
the members of the Fed's FederalOpen Market Committee, and
I expect they will err on the side of caution with their
rhetoric and action until at least the end of the
|2.P/E metrics don't indicate an overvaluation of the
S&P 500index .
Let's look at two common metrics.
The trailing price-to-earnings (P/E) ratio for the S&P
500 is currently 16.1, compared with a historical average
of 19.3 since 1960. In addition, trailing
price-to-earnings/growth (PEG ) ratio has averaged 1.6
since 1960 -- but now stands at 1.3.
Neither of these metrics indicates the S&P has become
|3. The technical picture remains bullish.
Using the S&P 500 as aproxy for the overall technical
health of the U.S. stock market reveals thebull move is far
Thecash index remains over 100 points above the upward
sloping 200-day simplemoving average , which is at 1,560.
While the 50-day simple moving average has provided price
support for 2013 and has prevented the most recent selling
from becoming hazardous to the bullish case.
|4. Europe has turned the corner.
The EuropeanCentral Bank has said it will do whatever it
takes to prevent another economic crisis in the region.
This has led towaves of positive sentiment sweeping the
eurozone, lifting stock prices and providing clear signs
that Europe's economy has turned the corner. (I recently
wrote about how toprofit from this change.) We live in an
economically connected world.
The continuing good news from Europe can only help to
support the U.S. stock market.
|5. China's showing improvement.
China is the engine for the world's economic growth. Recent
fears of a dramatic slowdown in the world's second-largest
economy have been greatly exaggerated.
Despite slight signals of slowing, the economy remains
stable and on track to hit the government's targeted
7.5%GDP growth rate this year.
These factors combine to paint a bullish picture throughout
the end of 2013. While we may not see dramatic upside, a sharp
decline is also unlikely. Things really are going to be
"different this time."
Risks to Consider:
No one knows the future, and anything can and does happen in
the stock market. "Black swan"-type events could derail my
projections for the continued bull market. Be sure to use stops
and position size properly.
Action to Take -->
This is not the time to dump stocks on the advice of bearish
pundits. Sticking with your long-terminvesting plan makes the
most sense right now. In addition, buying on dips should continue
to be a profitable investing tactic, at least until the end of
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