It took nearly five-and-a-half years, but on March 5, 2013, the Dow Jones Industrial Average finally broke through the October 2007 all-time high of 14,164.53.
The blue-chip index had flirted with 14,000 back in April of last year before eurozone debt fears and global growth worries sent stocks lower. Nevertheless, on that historic day in early March, the Dow jumped 125.95 points to close at a new all-time record. Since then, blue chips have pushed even higher, surmounting 14,500 as of March 20.
This begs the question: If the Dow does continue to rise, how high might it go?
How we got here
Stocks hit a then all-time high in October 2007 after a multiyear rally. These gains were built largely on a credit and housing bubble, which burst less than a year later. The collapse of Bear Stearns and Lehman Brothers were flashpoints of the crisis that saw U.S. markets plummet to levels not seen since 1997.
The current four-year rally can be traced back to March 9, 2009, when most major indexes sunk to their nadir of the financial crisis. In just the first year after bottoming out below 6,500, the Dow rallied 60%. There have been a number of ups and downs along the way as the blue chip index has gained about 120% since the 2009 bottom, bringing us to today.
Where might the Dow go from here?
Dave Keller, managing director of technical research at Fidelity, and president of the Market Technicians Association, thinks the momentum behind stocks could continue in the long-run, but there are risks. "In my view, many stocks appear overbought, especially in leading sectors—like health care and financials," Keller says. "This suggests to me that a short-term correction is possible."
However, he thinks that bullish technicals could underpin the market for the foreseeable future. "One tenet of Dow Theory states that an uptrend is a series of higher highs and higher lows, and as long as the index remains above its November 2012 low of 12,471, the uptrend could be intact," Keller points out.
A number of fundamental forces support the theory that stocks can continue to rally. The Federal Reserve has suggested it has no immediate plans to pull back from the $85 billion per month in asset purchases which has supported stocks to a great extent. Additionally, the U.S. housing and manufacturing segments have shown significant improvements over the past year, and booming U.S. oil and gas productivity could be in the early stages of an energy renaissance.
Keller is even more positive about the market’s long-term prospects. "The Dow could continue above 17,000, in my opinion, based on two different approaches. First, the index formed an inverted complex head and shoulders pattern, using the October 2011 low as the 'head' of the pattern. Measuring the distance between the head and the 'neckline', or a trend line connecting the interim tops, projects a high around 17,300," Keller says. "Second, if you apply a Fibonacci analysis1 using the 2007 high and the 2009 low, you can project a 38.2% extension, up to around 17,150 (see chart below)."
Look at the whole picture
While some key technicals may suggest the Dow can go higher, traders should be ever-mindful of the risks that threaten to derail the market’s momentum. These include:
- The possibility that the Fed could pull back at any time
- A revival of the sovereign debt crisis in Europe
- Potential cuts to federal spending, and the impact of tax hikes being felt, that have the ability to curb economic activity
- A perception by investors that the market is increasingly overbought if the earnings outlook deteriorates
Additionally, Jurrien Timmer, co-manager of Fidelity Global Strategies Fund, thinks that investors should be mindful of the seasonal 'sell in May and go away' pattern. "During the past three years, the winter months have been strong, and then the economy and markets peaked in the spring before suffering a soft patch in the summer," Timmer points out. "Perhaps this year, it will be different, and the economy and stock market will just keep going without repeating this pattern. Regardless, we need to be alert to the possibility that history will repeat once again."
Having broken through the all-time high—which previously served as a significant resistance level—14,164.53 is now a major support level. This means that the old record price level could help prevent the market from going lower. How much further up it may go from here remains to be seen.