By Charles Rotblut
The stock market's strong start to this year has created challenges for those of you who have been looking for opportunities to buy stocks. It is particularly challenging for those of you who have purposely kept your allocations to equities low. Do you buy stocks now or do you wait for prices to fall?
Unless you have confidence in your ability to predict the short-term direction of the market, you should buy whenever you find a good stock trading at an attractive price. Yes, you are taking the risk that the stock could drop in value soon after you buy it, but if you don't buy now, you risk having to pay an even higher price for the stock in the future.
I realize that there are still concerns. The latest debt deal for Greece provides no assurances that yet another rescue package won't be needed in the future. Oil prices are on the rise because of tensions with Iran, and the latest comments by Supreme Leader Ayatollah Ali Khamenei won't help calm fears about the country's nuclear ambitions. The U.S. economy continues to grow at a slow pace. Plus, forecasts for corporate profits are falling. Since the start of January, the projected 2012 earnings growth rate for the S&P 500 has been cut from 8.09% to 5.97%.
There are also many positives, however. The economy is expanding at a rate that is strong enough to suggest a double-dip recession is not forthcoming. Valuations are still reasonable. Relative to Treasuries, the earnings yield (earnings per share divided by the share price) favors stocks. Plus, several other indicators are positive including the golden cross (the 50-day moving average for the S&P 500 crossed above the 200-day moving average a few weeks ago), the January Barometer, the Super Bowl Indicator and the Sports Illustrated Swimsuit Issue Indicator. (The U.S. markets perform better when an American graces the cover, according to Bespoke Investment Group. This year, American Kate Upton is on the cover.)
(The relation of the Super Bowl Indicator and the Sports Illustrated Swimsuit Issue Indicator to stock market performance is oddly coincidental, but it never hurts to have a bit of extra luck on our side.)
As far as investing after a run in stock prices has occurred, the historical data suggests you could be rewarded for doing so. A report published earlier this week by Sam Stovall of S&P Capital IQ looked at portfolio returns for a $10,000 investment made on December 3, 1999, in the S&P 500. Regardless of whether the entire amount was invested on that day or invested over a period of time, the portfolio rose in value if dividends were reinvested. (I intend to publish the study, which compares dollar cost averaging to lump-sum investing in the April AAII Journal).
The Stock Trader's Almanac looked at past years with a strong start.
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