Dow Breaks Record, but Party Likely Won't Last
No confetti, no party hats, no champagne—the new record high for the Dow industrials came and went Tuesday with a minimal amount of celebration as investors prepared for what's to come.
That's because history strongly suggests that a bull market with so much gray in its beard not only will take a rest but also should have a seat. So those who missed the most recent leg of the rally can find another entry point.
(Special Report: Dow Record: How We Got Here, Where We're Going)
"We now believe we are at the first of three market pivot points this year and suspect a drop is now likely to unfold over the next several months," Piper Jaffray's Craig W. Johnson and Leah Williams said in a market analysis. "We suspect this pullback in the broader market will be tactical in nature and may represent the single-best buying opportunity this year."
The Piper analysts anticipate a rollback in stocks approaching 10 percent as part of the full-year forecast of "a hop, a drop and a pop."
The hop happened with the rise of more than 8 percent so far this year in both the Dow and Standard & Poor's 500. The drop is what is over the near-term horizon. The pop is what happens the rest of the way—a fairly strong rally after the pullback, then an easing through the rest of the way en route to a 2,000 price on the S&P by August 2014.
So even though Piper anticipates a retreat now that the Dow has broken its 2007 shackles, it would be part of a long-term constructive view on the market.
A market retreat could happen on any number of variables—the budget impasse in Washington, the re-emergence of the European sovereign debt crisis, or the simple breaching of technical points that have led some chart experts to see a "bearish rising-wedge" pattern that needs only a breakout to the downside to confirm.
"When you're in a lofty market it doesn't take much to pull things back down a few percentage points," said Peter Costa, president of Empire Executions in New York. "We're going to be in a narrow trading range once we break through this."
(Read More: Dow Smashes Record: End of the 'Lost Decade'?)
After some early-year strongly bullish indications, market sentiment has tempered recently.
The latest American Association of Individual Investors survey showed the biggest drop in bullish views in nearly 2 1/2 years. Another survey, the Investors Intelligence reading on investor newsletters, found bullishness at a 2013 low.
"We are still bullish on the market for the rest of the year, but don't expect the increase to come in a straight line, especially after the volatility we have seen over the last week," Bespoke Investment Group's Paul Hickey said in a report.
Research from Bespoke turned up an interesting trend when it comes to jackrabbit starts such as the market has made this year.
Such quick moves out of the gate—specifically, gains greater than 5 percent—often precede less positive returns than when the market gains less but is still positive. When the S&P 500 rises less than 5 percent in the first two months, the typical gain for the rest of the year is 10.9 percent, while a start greater than 5 percent usually sees the market adding just 4.2 percent the rest of the way.
That adds up to a market primed for profit-taking.
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"We're just priced for perfection here," said Uri Landesman, president of Platinum Partners fund in New York. A downturn catalyst "will be just the likelihood that the news will be worse than people expect in the economy. If the Fed stops pumping in liquidity, at some point the stock market will cease to be the safe haven that it's been."
Landesman said he thinks the market rally could continue for a bit until the S&P 500 breaks its own historical high of 1,565 before falling and not setting up an ideal buying opportunity until it drops "much lower."
"This has been a four-year relatively uninterrupted rally. It's gone up so quickly that there are very few strong (technical) supports below," he said. "If people get negative it can really go down fairly quickly."