There have been 39 times when each of those nine indexes has closed at multiyear highs at the same time, according to Lyons. On several of those occasions, we saw the market top out and retreat.

Will this be another one of those times? Obviously, Friday’s session showed some weakness, though the damage was slight. This week, the Fed and a full calendar of earnings will play a part in where investors take the market from here. The IMF got the ball rolling Monday with a downgrade of U.S. economic growth forecasts, which could dent stocks in the early going.

Putting technical analysis aside, our call of the day (see below) paints a pretty unsettling picture of what’s to come for this relentless market. But so far, investors don’t appear to be all that concerned.

The three potential black swans that they are concerned about are these.

Yellen overshoots, hiking rates too much and too soon
The European Central Bank runs out of bullets
China experiences a debt meltdown

One thinks back especially to the period before the dot com crash when conventional wisdom was brushed aside and people bought anything with .com in the name. It was argued that the nature of the market had changed and stocks would simply go up forever. There is some evidence of the same sort of thinking before the 1929 crash that ushered in the Great Depression. But this is not an isolated opinion. CNBC writes about two big forces that could affect the market come August.

While the overall breadth of the market has been sturdy, with more stocks rising than falling on a consistent basis, sectors have moved in and out of leadership in a kind of “immaculate rotation” that has refreshed and supported the broad indexes while keeping strong segments from getting over-extended and preventing weak areas from buckling the tape.

This has been the market’s character and will remain so until these patterns shift. The market, for many investors, has been too quiet to trust fully, yet too strong to fight with much conviction.

They argue that August is historically a tough time for stocks and note that the sort of complacency that goes with a continued bull market is likely to keep investors in the market even when warning signs suggest pulling out some cash. That being the case, when the market does correct there could be a monumental rush for the exits which would magnify losses and convert a correction into a crash. Beware of the three potential black swans.

Three Potential Black Swans DOC

Three Potential Black Swans PDF

Three Potential Black Swans PPT

In posing the question how high can stocks go, we should consider fundamental analysis of individual stocks, the markets in general, the US and world economies, and the prospects of other, non-stock, investments in the near term future. And, one should always consider the lemming effect, the herd following market leaders, even when all of them are heading for the proverbial cliff.

Does Government Policy Set Market Prices?

Wall Street hit a record high and markets across the globe followed. Japan‘s Nikkei 225 index is up to nearly a five year high. In both cases much of the enthusiasm has to do with Federal Reserve/Central Bank policies. Somewhere around $7 Trillion in equity was erased when the markets tanked in 2008. Governments bailed out banks to keep credit markets afloat and engaged in gigantic stimulus programs to get their economies going again. Much of the enthusiasm in the markets comes from an optimistic view of how much longer the Fed and other institutions will continue to promote growth with their policies. How high can stocks go? That depends on the Fed and other central banks and on the perception of the market.

How about Individual Stocks?

Picking new winners in the stock market typically has little to do with the general state of the economy or monetary policy. The success of a new company has to do with its products and its sales. Intrinsic stock value is the expected future earnings of a company discounted to current cash. When a stock is underpriced as compared to its future earnings potential it is a good buy and when it is overpriced in this regard it is time to sell. How high can stocks go in this regard? Microsoft grew about two thousand fold before it corrected and leveled off a few years ago. No matter what the economy is doing there is a bio tech company out there that will come up with a cure for diabetes, Alzheimer’s, or heart disease. How high can stocks go when the company has a unique product? The sky is the limit.

Is the Market on Track or Is the Market Crazy?

If you believe that the world economy will get back on track, that North America and Europe will regain full financial health, that these two giant economies will continue to lead in innovation, you want to own stocks in these economies. If not you will want to look elsewhere. If you believe that the BRICS nations will grow and prosper you will want stocks in Brazil, Russia, India, China, and South Africa. If you think there are problems, such as potential BRICS development bank problems that we mentioned recently, you will want to be careful there as well. As we consider how high can stocks go we should also consider what will happen if there is another major shock to the markets such as an expansion of the war in Syria or even conflict with Iran over its nuclear ambitions.

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