Dow 14,000: What Bulls Need to Consider

The bulls are running! Despite a headline unemployment figure that ticked up to 7.9% in January from 7.8% the previous month, investors sent the S&P 500 and the narrower, price-weighted Dow up 1% and 1.1%, respectively. Both indexes set new five-year highs. That optimism was reflected in option prices, as the VIX Index dropping back below 13. (The VIX, Wall Street's "fear gauge", is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming thirty days.)

Leveling with the bulls
The Dow crossed the 14,000 mark several times today, finally settling above that level at the close of the market. Prior to today, the Dow has only closed above 14,000 on nine days, all but one of those occurring in October 2007 -- the last gasp of the pre-crisis equity market rally (the one other time was just a few months earlier in July 2007). That also puts the index within reach of its all-time high of 14,198.10.

Does breaking through the 14,000 level matter? Investors, pundits, and journalists like round numbers, but the plain truth is that it has no intrinsic significance. What about the immediate comparison with October 2007 -- is there something to that? Yes and no. More than five years on from the start of the credit crisis, the economic, financial and policy environment is dramatically altered. Although many risks remain -- including central banks' ability to wind down their monetary munificence -- economic fundamentals are sounder than they were back then.

Where the comparison with 2007 looks appropriate is that the new highs being set in the stock market appear to reflect a certain exuberance that has gotten ahead of the underlying fundamentals, improved though they may be in the current instance. No crash is imminent, but some sort of correction should surprise no one.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

The article Dow 14,000: What Bulls Need to Consider originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @lonrunreturns. The Motley Fool has no position in any of the stocks mentioned. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.