Dow revisits 14,000: Sign of top or new leg up?

NEW YORK — When it comes to big, round numbers with investment significance, 14,000 is as big as it gets for the Dow Jones industrial average.

Indeed, Dow 14,000 is back in play and in the headlines after the iconic 117-year-old blue chip index briefly topped that lofty milestone Friday for the first time since October 2007. The move pushed the world’s best-known stock gauge to its best level since the 2008 financial crisis and left it just shy of its Oct. 9, 2007, all-time high of 14,164.53.

Around 10 a.m. ET the Dow was up roughly 140 points and popped over 14,000 for a minute, extending its 2013 gains to 6.8% and boosting its return from the bear market low in March 2009 to 114%.

STOCKS FRIDAY: Jobs report ignites rally[1]

The Dow’s heady rush to levels not seen in more than five years, and potentially to heights it has never seen before, has elicited feelings of renewed hope and cautious optimism on Wall Street.

The sense of optimism comes from the fact that the Dow’s rise is reflecting a belief that economies, in the U.S. and around the world, are in a better place and on the road to recovery.

The lingering skepticism on the part of some investors comes from the knowledge that Dow 14,000 is an area where the stock market topped out in 2007 and a level that has acted more like a ceiling for stock prices, rather than a floor.

In fact, the Dow only closed above 14,000 on nine trading days in 2007, including its first-ever close above that psychologically important number on July 19, 2007.

It is not an overstatement to say that Dow 14,000 is the biggest round number the Dow has ever had to try to climb in its long history.

“Rarified territory is a good way to describe it,” says Jamie Farmer, managing director at S&P Dow Jones Indices.

And the thinner the air, the tougher the slog.

“We are back to levels where the market has had trouble sustaining highs in the past,” says Richard Moroney, editor of Dow Theory Forecasts newsletter.

But records are meant to be broken, and there are reasons why the Dow has been rising and a case to be made that the rally has room to run, and a new record high is within reach.

The Dow’s move up, Farmer says, has been driven by a growing belief that headwinds, such as the sub-par economy, the November elections, fiscal issues and Europe’s debt woes, are diminishing. In short, it says things are getting better.

“What’s driving the market narrative right now is a burgeoning sense of recovery and confidence,” says Farmer. “The Dow is emitting a signal that sentiment is on the rise.”

The Dow’s long reputation for reflecting the national mood and acting as a leading economic indicator also bodes well, he says.

“The Dow provides historical touchstones,” says Farmer. “When Americans hear the number of points the Dow is up or down, their minds immediately translate that. The 14,000 number has a reference quality to it and has enormous value in itself.”

One benefit of the Dow’s positive news is that investors who have been sitting out the rally, either in cash or bonds, might start funneling more of that so-called “safe money” back into stocks, says Moroney.

“If we can bust out to a new high it will add to the pain trade for those people who are underinvested in stocks,” says Moroney.

The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at a slightly cheaper price-to-earnings ratio than it was at its prior top in 2007 and sports a P-E that is 50% below where it was during the prior peak in 2000, according to S&P Capital IQ data.

Another plus is investors are far less exuberant than they were back in 2007, when stocks and real estate were flying high.

While a correction can’t be ruled out, the fact the Dow is at five-year highs suggests it is decision time for investors.

“You can’t focus on the fact that you missed the rally,” says Moroney. “The fact that the Dow was at 6,547 in early 2009 is not relevant. The question is what do you want to do today?”

Moroney says stocks offer a better alternative than bonds and cash.

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