Three fears drive investor behavior:  fear of the unknown, fear of loss and fear of missing out.  With President Obama in the White house for four more years, ObamaCare officially the law of the land, the fiscal cliff calamity avoided and the apparent extension of the debt ceiling, the fear of missing out is driving this rally.

The Big Picture

The fear of loss, such as the one most investors and consumers experienced during the 2008 financial crisis, has kept most individual investors on the sidelines.  Many listened to the naysayers and their gloom-and-doom predictions which failed to materialize.  Now, with stock indices at five-year highs and interest rates artificially low, investors are embracing more risk to get a higher return. 

Housing prices are rising at the same time jobless claims are falling to five-year lows, encouraging signs for consumers with pent-up demand.  Fourth quarter earnings reports are coming in better than sharply lowered expectations with weak estimates going forward pretty much priced in.  December retail sales, hurt by the fiscal cliff uncertainty, still managed to rise 0.5%.  Still, consumers must now deal with higher payroll taxes that mean smaller paychecks. 

In spite of that, the first five trading days of January saw the S&P 500 rally nearly 2.2%.  Called the January effect, when the first five days are positive, stocks end the year higher 85% of the time.   The January barometer is even more telling; if January is positive for stocks, the rest of the year will be as well.  While not quite as accurate, the January barometer can confirm a positive year when accompanied by a Santa Claus rally and the January effect. 

I, Investor 

Another theory getting some attention is the Dow Theory, which states that for the Dow industrial average to make new highs, we need to see new highs in the transportation index, reflecting delivery of all those goods being produced.  Divergence of these two indices is a warning sign to be heeded.  Well, the Dow Transports hit its fifth cosnecutive all-time high Tuesday, January 22, 2013 of 5757.  The Dow Industrial average is less than 500 points away from its all-time high of 14,198.10.

 Further technical confirmation comes from moving averages and volume statistics.  The S&P 500 index is trading well above is 50-day moving average, and is nearly 1000 points higher than its 200-day moving average.  Prices would need to deteriorate dramatically to generate a sell-signal.  A Wall Street truism is that volume leads price.  Volume has been increasing, confirming the price trend is up.   

However, nothing goes straight up.  The rally off of mid-November lows has been steep and a correction cannot be ruled out.  But Wall Street also preaches that “the trend is your friend” and “don’t fight the tape”.  Don’t be surprised if more money enters the market on pullbacks with all-time highs the next hurdle. 

Key levels for the S&P 500 index as of 1/22/13 close:

           All-time high      1576

          Near term resistance    1500

          Near-term support       1475

          50-day moving average        1424

          200-day moving average      1394

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