So far in 2012, the one word to describe the market would be “rally”. After a disappointing 2011 the market began to take off. The beginning part of this year has seen its catalysts however. We have seen a continuation of job growth which has now developed into a trend. The American consumer has turned around and begun a more optimistic viewpoint of the economy and the markets. Europe seems to have contained Greece’s debt wildfire. All of these catalysts and more have pushed the three main stock indexes in the US to milestones. The Dow Jones, after many different attempts, has finally secured itself above 13,000 to where it currently stands at 12,241. The Nasdaq, which has been the strongest performing index, recently closed above 3,000 and finally the S&P 500 (INDEXSP:.INX) is just now above 1,400, a level not seen since June 2008.
Putting aside indexes for a moment we have seen such stocks as Apple explode as well. The company opened trading today at $600 a share but currently sits at $590. Besides the share price, the company’s market cap of 550 billion is worth more than Poland. Needless to say, Apple has been a huge target for fund managers and investors alike to get in on some nice gains.
All of this good news and rising prices has to make you think, when will it end? We have climbed so far so fast and without a real pullback that some analysts are saying to expect a 15% correction during summer months. Whether this is true or not will not be known but the analyst brings up a good point. Everyone is buying hand over fist, hand over fist yet there has been little profit taking. It is only going to take some bad economic reports to send these fund managers running to the hills and taking profits, at least in theory.
The recovery is real; there is no doubt about it but does that warrant these kinds of gains this quickly? Equities are still undervalued on a historical basis. Corporate profits are growing faster than share prices which have positive and negative connotations. On one hand, corporate profits have been a glimmer of hope back when the recovery wasn’t so strong and it proves that our economy still has some juice left. On the other hand, could it be a bubble? Analysts are continually raising forecasts and expectations but at a point there has to be a correction. Having this much strength in the equities market is a bit off-putting for me. I am taking a more conservative route right now but I plan to be in short positions once the market begins to show more signs of a correction.