A Rally Based on What?

03/19/2013 8:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The series of new highs for the Dow has many wondering, why? MoneyShow's Jim Jubak shares his thoughts about the market's current status, and what could change his outlook.

For the week ahead-actually, for the weeks ahead, probably-your job is to figure out what to do with the rally of US stocks to all-time highs on the Dow and the S&P and the Nasdaq.

The climb to an all-time high is lots and lots and lots of fun. You get to sit there every day and think oh my goodness, we're moving up, we're getting closer to that peak. All-time highs or peaks of any sort aren't nearly as much fun, because there starts to come this nagging doubt, which is, "Oh yeah, we're at a high, but doesn't that mean now we have to go down?"

That's especially a problem right now because well we all have a feeling that this market is not based on the strongest fundamentals. Growth in the developed economies ranges from nonexistent in Japan to pretty terrible in Europe to not so great but at least positive in the United States. In emerging-market economies, I mean China is chugging along at over 7.5%, but not in a way that makes anybody feel really, really great. Brazil looks like it's slipping.

So you look at this, and OK, this is a rally based on faith in the central banks of the world. Based on the faith that the Bank of Japan, the Federal Reserve, the European Central Bank, the Bank of England are all going to support assets, although that's not what they're trying to do. They're trying to revive their economies, but they're going to pump money into the global economy.

You look at this and go, "Gee, doesn't this mean that we're at a point where it's a thin reed and we should be taking money out of the market?" Well, the problem is that if you look at it, it's very much been the thin reed that's driven stocks up to this height.

Fundamentals haven't been good during this whole rally. Central bank money has been driving the whole rally so you've got to sit there and see it's not that things have changed. "Central bank policy doesn't look like it's about to reverse, so why do I feel suddenly that this rally is about to run out of gas?"

I think as long as central bank policy remains the same in all of those countries, as long as we don't get some external event like a big blow up in the Eurozone with Italy and Spain or Cyprus or France or something like that, and as long as we don't panic over the next set of minutes from the Fed's meeting, this rally goes on for a while. How long is really the issue.

So the market is not expensive on a historical basis, as money is really, really cheap and still getting cheaper. The Bank of Japan in April will probably launch a whole new stimulus package and move forward the one that was set to go in January 2014 to sometime in 2013. All these things mean that the stuff that's been driving this rally is still there, the fuel is still there. Fundamentals are still not supporting it, but hey, until you see something that says the central banks are out of gas or are about to change policy, I think you don't need to rush to move things out of this market

On the other hand, you never like to buy at a high, so don't go crazy on one way or the other. If you're out of the market, maybe you can find some places to put money in. If you're in the market, maybe you can find some places to take some money out...but there's no reason to say that just because we hit a high, we're now going to head to a bust.

Related Reading:

2 Longtime Bulls Pull in Their Horns

Don't Be Tempted by Exuberance

Central Bankers' Hot Air Shortage

Related Articles on MARKETS