Don't Worry: Dow 17,000 Isn't Out of Reach

Investors have gotten so used to the Dow Jones Industrials rising without interruption that even minor setbacks cause a big shift in sentiment.

Jun 13, 2014 at 9:03PM

The Dow Jones Industrials (DJINDICES:^DJI) closed up almost 42 points on Friday, limiting the Dow's losses for the week to about 150 points. Yet, what's surprising about the stock market is how quickly investors have become pessimistic, with two straight triple-digit declines for the Dow making many people think that a correction is imminent, even though the two-day drop barely added up to 1%. By contrast, the Dow remains just 225 points below the 17,000 mark, and all it would take is a minor push forward for the stock market to eclipse that level and potentially send investors into a bullish frenzy all over again. Let's take a look at the inflection point that investors face right now.

Source: Wikimedia Commons. Courtesy Walters Art Museum.

The bull-bear tug of war
In past bull markets, the Dow Jones Industrials followed a relatively similar pattern. In the early stages of an emerging bull market, most ordinary investors were still shell-shocked from losses they had suffered during the preceding bear market. As a result, they were typically slow to get back into the market, often missing out on a huge share of the initial run-up in the Dow. Eventually, performance-chasing mainstream investors regained confidence in the market's ability to produce solid returns, and they therefore invested in the market. In some cases, the wholesale adoption of stock market investing by even novice investors provided a contrarian indicator for more sophisticated investors to back out of their stock positions, leaving the market vulnerable to a further pullback.

This time around, though, there's a new dynamic that's changing the supply-and-demand equation for stocks. During the financial crisis, even the largest companies suffered from liquidity problems. Goldman Sachs (NYSE:GS), General Electric (NYSE:GE), and Bank of America (NYSE:BAC) were just a few of the major companies that went to extraordinary lengths to get the financing they needed, tapping both private-sector funds and government sources provided by bailout legislation. That experience taught companies the value of cash, and in the ensuing recovery, cash has reigned as king, once again.


But as the economy has improved, many companies have too much cash, and they've been looking for ways to deploy it. One of the most common methods has been stock repurchase programs, which, in many cases, have reduced outstanding share counts of popular stocks, and left investors chasing fewer available shares. As it happens, company buybacks also have a checkered history of being ill-timed, as they usually come when businesses are flush with cash and, therefore, when stock prices are especially high.

The major question is whether individual investors will side with corporate buybacks or with institutional investors, which have been the primary owners of the shares that companies have bought back. If the Dow Jones Industrials and the broader stock market start to fall in earnest, then institutions could redouble their efforts, and eventually woo individuals to the bearish cause. But if the Dow keeps rising, underperforming institutional investors will feel even more pressure to get back into the market to avoid missing out even further -- and potentially feed a bull market to Dow 17,000 and beyond.

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Dan Caplinger owns warrants on Bank of America and shares of General Electric. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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