The S&P 500 Is Pushing Yearly Highs… What Now?

| August 17, 2012 | 0 Comments

In case you haven’t noticed, the bulls are loose on Wall Street.  After a nasty correction earlier in the year, major indexes are now on the verge of pushing to new yearly highs.

In fact, the Nasdaq 100 is within spitting distance of its late March high at 2,794.  What’s more, the Dow is within a whisker of testing its 2012 high of 13,338.

And let’s not forget about the S&P 500.  This widely watched index has its sights set on 1,422, the 52-week high set in late March…

S&P 500 Large Cap Index Chart

Why are stocks suddenly galloping higher?

After all, it was just two short months ago that markets were diving and investors were cowering under their desks due to Europe’s debt problems.  Overseas worries had nearly everyone convinced a full-fledged market wipeout was knocking on our door.

Well, guess what

It didn’t happen.

As a matter of fact, Europe’s well on its way to establishing a solid long-term plan to put their debt crisis to bed once and for all.  Now, I won’t go as far as to say we’ll never hear about their problems again, as there are still plenty of issues to be tackled.

However, the odds of a full-scale 2008-style market meltdown are all but gone.  And investors’ collective relief is partly why they’re pushing stocks back to yearly highs.

But this big sigh of relief isn’t the only reason stocks are moving higher…

Many investors I hear from are befuddled at the fact stocks keep rising.  And I’m sure there are plenty of short sellers ready to pull their hair out right about now.

So why do stocks keep rising?

It’s simple… they’re cheap.

In fact, stocks as a whole are cheaper now than they have been in quite some time.

You see, earnings yield is a great measure of the desirability of equities.  And right now the S&P 500 has earnings per share of around $102.  Divide that by the S&P 500’s current value -1415- and you’ll find the index carries an earnings yield of just over 7%.

Now, compare that to the rate of ten-year treasuries, which is currently 1.8%.  Historically, the S&P 500 earnings yield runs at a 3% premium to ten-year treasuries.

But right now stocks are trading at more than a 5% premium over the ten-year.  In other words, ultra low ten-year rates along with strong S&P 500 earnings make stocks a very attractive bet right now.

So does that mean you should rush out and dump your entire nest egg into the stock market?

Hold your horses cowboy…

While the stars appear to be aligning for a strong market performance into year-end, the best time to buy stocks was back in late May, when investors were running scared.

With markets back near 52-week highs, we’ll likely see some profit taking over the next few weeks.  And that means investors pushing the buy button now are acquiring stock from the pros who bought in early June.

The best course of action is to be patient…

If you’re ready to invest, start by making a shopping list of your favorite stocks.  Wait for the market to pull in a bit, and then start putting your money to work!

***Editor’s Note***  Our own Robert just released the name of a tiny biotech stock that has some tremendous short-term potential.  The stock is now part of his Biotech Supertrader portfolio.  Click here to check it out before it moves out of his buy range.

Until Next Time,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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