How High Can Stocks Go?

That is the question many investors are looking to answer now after the Dow Jones Industrial Average reached new all-time highs. Technical traders will look for previous performance and price patterns as clues to the future, and traders may want to heed this intriguing call.

James Mackintosh, in his daily column, The Short View, in the Financial Times, highlights that investors should not be looking at the bull markets that peaked in 2000 nor in 2007. Rather, he looks at 1987 as the best comparison to the current market.

Specifically, he sees March of 2013, right now, as most similar to March of 1987 for several reasons. Mainly:

• U.S. equities are trading at similar multiples near 13.3 times next year's earnings.


• The U.S. economy is almost four years into an expansion, although at a much slower pace than in 1987.


• Government bond yields are on the rise.


• Corporate bond spreads are at similar levels due to strong demand for high-yield issuance.


• Inflation is below 2 percent.


• Capital Gains taxes were hiked at the beginning of the year, as in 2007, causing many sellers to sell before the year end to capitalize on lower tax rates.

1987 does not bring many fond memories to investors as the key date that year is known as Black Monday, where stocks lost more than 22 percent in one day. However, many will forget that from March 1987 to September, before the crash, stocks rose 16 percent.

"The US economy took off rapidly in 1987, prompting Fed rate hikes which eventually cooled the overheated market. There is no risk of rate rises this year, but if last week's surprisingly good jobs figures are repeated, concerns that the Fed could slow or stop its bond buying are sure to grow."

However, slowing of quantitative easing purchases does not in any way equal rate hikes in the scope of changing monetary policy. Also, only a handful of economists see the pace of purchases slowing in 2013 and into the beginning of 2014. The strong jobs figures from February would have to continue for months before the Fed even considers slowing purchases, so long as inflation remains low.

However, Mackintosh does see a healthy correction coming in the near future. "A market correction now would be healthy. Without it, the 1987 comparison suggests fat profits ahead – but only for those who sell in time."