With Stocks at Record Heights, What Opportunities Remain for Still Greater Returns?

Opportunities Remain for Still Greater ReturnsMore gains ahead—or at least I’m sensing the stock market has more room to advance, especially with the bullish investor sentiment that has characterized the majority of the year continuing to hold.

The S&P 500 and Dow Jones Industrial Average continued to advance to record heights last Wednesday and again on Thursday. The near-term trend is pointing higher. The S&P 500 will likely break 1,800 prior to the year-end, unless consumer spending tanks.

The stock market even appears to have discounted in some tapering in December or January. Traders realize the tapering is coming and they’ve come to terms with that—as long as it’s slow and the economy delivers stronger and steady growth. A slight rise in long-term rates and the 10-year bond yield is not going to hurt the stock market that much.

The rise in the Dow Jones industrials continues to be confirmed by an associated rise in the Dow Jones Transportation Average, as reflected on the chart below. Both the industrials (red candlesticks) and transportation stocks (green line) are trending higher, and that means more gains ahead.


Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

Fighting the trend is fruitless at this point. The breakout appears to be holding, as indicated by the blue oval on the chart above. Now we could see a correction down to around 14,700, but this would be a buying opportunity, as I sense the stock market will continue to edge higher. (Read “Vulnerable Key Stock Index May Be Signaling Upcoming Buying Opportunity.”)

As we move toward year-end and into 2014, I expect the stock market to advance higher. So make sure you are invested for more gains and have cash available for a possible buying opportunity.

A look at the S&P 500 in the chart below also shows a clear breakout at the top multiyear resistance level. The breakout may be false, due to the lack of active participation, as shown by the declining volume (lower-right of chart). But so far, it has held up pretty well, contrary to its overbought condition.

S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

The stock market simply doesn’t want to give in at this point.

As long as the Federal Reserve continues to pump money into the economy, the stock market will likely reach higher, as shown by the below chart comparing the M2 money supply to the S&P 500 (green line).

M2 Money Supply Chart

Chart courtesy of www.StockCharts.com

So at this time, everything is pointing higher. The stock market will likely continue to rise, so you need to be in equities to ride the wave higher. If you want more of a risk-managed strategy, play the potential stock market rise using call options on the S&P 500 and the Dow. This way, you have a leveraged trade that could return big if stocks move higher.