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Stocks Are Long Overdue For A Major Pullback

Friday, March 3, 2017 4:26
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From Mike Burnick: The Dow Jones Industrial Average rose for the 12th-straight trading session on Monday. That’s a rare feat the Dow hasn’t achieved in three decades. The last time it happened was, gulp, 1987!

Also, the S&P 500 Index is nearly 10% above its 200-day moving average, more extended in price than at any time in the last four years! Does this mean stocks are cruising toward another crash just like 1987?

Perhaps, but history suggests the odds are in favor of further gains.

The comparison with 1987 may send chills down investors’ spines, but it’s worth noting the Dow’s 12-session winning streak that year happened in January. And the Dow went on to gain another 30% before the fateful peak in August 1987.

Granted, investor sentiment is exuberant these days, as you can plainly see in the chart above, and you could even argue that it borders on the irrational. However, the stock market is showing powerful upside momentum, with year-to-date gains of 5.9% already in just the first two months of 2017, and a 300-point surge in the Dow yesterday!

Historically, such strong momentum has been an indication of robust gains over the rest of the year.

In fact, the S&P 500 gained 1.3% over the first five trading days of 2017, and it rose 1.8% for the full month of January. This gives investors a green light from the so-called January barometer.

In the past, whenever this bullish combination – a positive January plus strong gains in the first five days – occurred together, stocks went on to post well-above-average gains of 14.6% for the full year.

That’s nearly twice the average annual gain of 7.5% for stocks in any given year.

Also, this is the first year of a new presidential cycle, and when stocks start the year strong with a new president in the White House, the market performs even better, with average gains of 18.5% for the full year!

So according to this gauge, the Trump bump for stocks may just be getting started.

And while this bull market is certainly long in the tooth at eight years old, history also shows the biggest gains are achieved in the last two years of a bull market run. In fact, the S&P 500 has historically surged almost 60% higher on average during the final 24 months of bull markets!

Bottom line: The stock market is overbought, and hasn’t suffered anything close to a 20% correction in nearly six years now, so we’re certainly overdue for another. However, history suggests the momentum behind this rally is strong enough to propel stocks even higher, delivering above-average gains this year. Any correction along the way would provide a good buying opportunity.

The Vanguard 500 Index Fund (NYSE:VOO) was unchanged in premarket trading Friday. Year-to-date, VOO has gained 6.60%.

VOO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 109 ETFs in the Large Cap Blend ETFs category.

This article is brought to you courtesy of Money And Markets.

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