After sharing overly bullish outlooks for the S&P 500 (SPY) in 2011 (1500 target) and 2012 (1600 target) but at least getting it directionally correct, I decided I ought to be a bit more quiet this year when I shared my 2013 projection of 1664 (based on 14.5X PE on projected 2014 earnings) as I described my "post-fiscal cliff" strategy early in the year. After a great start, we are now less than 10% from my level and just 4% from the all-time high of 1576. Some parts of the market, like Small-Caps and Mid-Caps have already posted new highs, but nay-sayers rightly point out that they don't really count. One big milestone, though, which is just a whisper away, is the potential all-time high for the Dow Jones Industrial Average (DIA).
Let me say that I am not a huge fan of the DJIA, as it's not representative of the market in my view. It's not so much that it's just 30 stocks. Rather, it's the way the index is constructed. Instead of market-cap weighting, like the S&P 500, which also suffers from some methodology challenges, the Dow is price-weighted. This means a stock like Bank America (BAC) can double and it's a rounding error, while International Business Machines (IBM), as the highest-priced component, has a huge impact. In case you aren't familiar, Dow-Jones, which maintains the index, employs a "divisor" (currently 0.13 roughly), which means that each stock is multiplied by the inverse (7.68) and then summed to get the total of 14,090. With IBM currently at 202 or so and BAC at 11.34, IBM has almost 18X the impact on the index than BAC though its market cap is less than 2X.
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