DOW JONES: 18,000 BEFORE END OF 2015 ? ? ?

Why we’ll see Dow 18,000 before this bull run ends

Commentary: Market fundamentals to boost stocks through 2014

By Gene Peroni

CONSHOHOCKEN, Pa. (MarketWatch) — The U.S. stock market has proven to be adept at navigating some exceedingly challenging headlines over the past four years. Yet even now, under choppy conditions, the market’s direction is aligned with the bulls.

Based on the technical qualities of the market’s advance so far this year, the market’s risk/reward ratio remains attractive both short- and longer-term. I see the Dow Jones Industrial Average DJIA +0.40%  ending 2013 at between 14,750 and 15,100; by the time this cycle ends in 2015, the Dow will be at 18,000.

How to handle an audit

Since bottoming in March 2009, the market has done an admirable job of policing its excesses on an ongoing basis through individual stock consolidations and rotational sector backing and filling. This has kept speculation in check, valuations at appealing levels and market sectors in balance, with no group substantially outpacing another for very long. The earnings multiple on the Standard & Poor’s 500-stock indexSPX +0.32%   remains attractive, attributable in part to good growth in earnings. Accordingly, the market is not becoming speculative or overvalued. Read more: Top forecasters tell where to put your money now.

Although concerns do remain regarding Europe, action in the “fear index” (the CBOE Volatility Index VIX -0.30%  ) reflects a long-term pattern of descending peaks. This suggests that investors have largely discounted their biggest worries about the euro zone and other once-troubling topics.

After the Dow’s stunning first-quarter advance, there are legitimate and understandable reasons to expect a pullback. But, from my technical perspective, it does not appear that stocks are overvalued or overbought to the extent that the market is in danger of a 10% or greater retreat. Read more: Paul Farrell says David Stockman's market crash prediction is 'truth telling.'

While some market observers have expressed disappointment regarding the market’s volume trends, I have always maintained that turnover alone is not an appropriate measure of momentum. It is far more important to determine what the underlying accumulation/distribution characteristics are for individual stocks and the overall market. Those who have been awaiting a “breakout” in general market volume may well have risked missing the lion’s share of this advance since March 2009.

Predicting the timing or depth of a decline could prove difficult and may even be distracting, given the broad field of technically attractive stocks at this juncture. The market is being driven by many different and diverse sectors and does not appear vulnerable to any individual micro-thematic event.

Several attractive sectors

One top-performing area is health care. With considerable research and development progress in medical technology and devices and a good pipeline for pharmaceuticals, this sector remains strong, despite previous fears surrounding the Affordable Care Act.

Gene Peroni

Manufacturers have been and remain another of my favorite market categories in this cycle, with good depth on numerous attractive stocks in the respective subcategories and broad representation of large, medium and small-cap companies.

Energy stocks also look good, reflecting increased demand due to a global economic expansion. Financials, consumer staples, such as food and beverages, and media and leisure time stocks are appealing as well.

More money is coming in off the sidelines. This appears to be an acknowledgment on the part of investors that the market may be embarking on a more aggressive course to higher levels.

Non-institutional net money flows have indicated accumulation trends in stocks for several years and have recently been accompanied and bolstered by net buying activity among institutions.

Based on the positive technical qualities of the market’s advance this year, Dow 14,000 could become a meaningful and enduring support area. This would represent a retreat of 3% from recent highs, a mild retracement when taking into account the market’s longer-term achievements, along with its shorter-term feats.

And although Dow 15,100 represents my 2013 target area, this forecast could prove conservative. If the Fed remains committed to a transparent monetary policy and earnings continue to grow beyond Wall Street’s consensus expectations, the Dow may keep moving up.

Gene Peroni is senior vice president of equity research at investment firm Advisors Asset Management .