One Man's Ceiling Is Another Man's Floor .... Until That Other Man Take the Stairs!

With all the talk of the recent stock market highs being a bubble, I submit an alternate view.  Suppose instead that we may be about to form new support.  I think it is possible that the highs on the S & P and the Dow will turn from being a ceiling to a strong floor.

This week is not our first run at the highs, as we keep testing resistance, and once we've broken through we will no doubt test these levels from the other side.  (Old resistance becomes new support.)  If the highs hold, I can envision a chart forming a floor with strong technical support at 2000 on the S&P and 17,000 on the DOW.  Large round numbers with lots of zeroes offer a strong psychological effect - drawing you in and then holding you above.

Literally speaking, the ceiling becomes the floor once you take the stairs.  And if the animal spirits, the technicians, and traders, all start to view these historic market numbers as support, rather than resistance, this is a powerful paradigm shift.  Which would draw substantial new money into the market and squeeze out the shorts. And if volumes are good to boot, such positive market action bodes well for adding to the averages.  Focus would then shift from the fear of an imminent correction in the near term, to a renewed sense that the risk is to the upside.  Then the stage is set for a new leg up!

If this is supported with fundamentals including broad sentiment from economists, consumer & business surveys, combined with acceleration in the economy and earnings, then the ripple effects of consumer spending, CapEx, hiring, wage growth, etc. will all provide a credible basis for unseen new highs in the market - just waiting for final corroboration by the NASDAQ as it too returns to its all time record high of 5,048 reached on March 10, 2000.

And, as we shift focus from the 4Q to 2015 forward earnings, and the market starts to calculate in price multiplier expansion, there will be less justification for calling the market overpriced.  Again, corroborating the market's strength.

By the same token, some stocks have high expectations already baked into their prices, and could even pull back as the market moves higher.  Other stocks, have plenty of room to run and/or have lagged the market and are undervalued.   A classic rotation, which is healthy.  Stock pickers love markets like this!

At some point we are due for a healthy correction. Nothing to suggest that the secular bull is over, but more than the short little dips we've been having. A good 8-12% drop would shake out the loose hands and take some froth out of stocks that got ahead of themselves. There have been plenty of calls for this to happen, and it will.  But I think we get it from a higher level. I am moving to the side as we approach 2050-2090 on the S & P to let the bears have a little party. What's going to hurt most is the tax consequences from selling winners, but the opportunity to buy on this correction once it settles down will make it worth while! I definitely want to exit my losers before then because tax selling on those is going to really put them in tank!

Of course, some massive Geo-political event, such as the unraveling of the Russian economy, a new regional military action, boiling over civil unrest in Europe, or even a large consequential natural disaster such as the likes of the tsunami that brought down Fukushima, could rock the boat. But there is always a potential "Black Swan" out there and it doesn't need the stock market to tell it when to strike.

As negative as things are in Europe, the ECB has been much slower than the USA or Japan to implement major quantitative easing and monetary stimulus.  With risks of deflation and a recession looming over Europe, Mario Drahgi and the ECB are becoming increasingly dovish.  If Drahgi were to go forward with some monetary "shock & awe" to kick start inflation and the European economy, then Europe would go from being a headwind on USA GDP to a tailwind.  Put that together with a long awaited housing boom and consumers heading back into the stores and things get extremely interesting for equities!  Especially, if inflation in the USA continues to hold to its low pace.

And, once the Federal Reserve ends its asset purchases in October as scheduled, and we find that the economy can stand on its own. That will send an extremely positive message to the street!  Skeptics needs to see that the markets can withstand the punch bowl being pulled away. 

Keep in mind that we've had one of the slowest recoveries on record, so just maybe it's time for this economy to finally breakout.  And, if/when it does, the most hated stock market rally in decades may give the naysayers even more reasons to hate it.  Or, better yet, maybe the hold-outs will take the stairs and join us on the new floor!