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Major U.S. stock indices reached "psychologically important" levels for the first time Monday morning, fostering the belief of analysts that the country's equity market has the potential to post a mild rally in the final two months of this year.
Set to clear new milestones
The blue-chip Dow Jones Industrial Average pierced through its milestone level of 16,000 points, while the broader S&P 500 briefly touched 1,800 points in the morning session.
The tech-heavy Nasdaq Composite Index also closed at 4,000 points, which has not been seen since September 2000.
However, major stock indices started to retreat after New York Fed President William Dudley gave an optimistic outlook for the U.S. economy next year, refueling investors' fears of tapering by the Federal Reserve coming earlier than expected.
The decline accelerated in the final hour of trading when activist investor Carl Icahn was reported to have said he is "very cautious" on equities and expects to see a "big drop."
Keith Bliss, senior vice president at Cuttone & Co., told Xinhua that those round-number levels are only psychologically important, saying the market will push through the levels after a few days of consolidation.
"The markets are really tentative and skittish right now. There is still not a lot of volume out there," Bliss said, adding that it could take a day or two, or even a week, for people to believe this move is going to push and keep the S&P 500 above 1,800 points and the Dow above 16,000 points.
The U.S. stock market regained momentum last week on Fed chair nominee Janet Yellen's dovish testimony in her confirmation hearing before the Senate Banking Committee.
Last Thursday, Yellen said the U.S. central bank needs to do more to bolster the economic recovery, which investors embraced as a positive sign that the Fed is not in a hurry to trim its asset purchases.
"The market is really at all-time highs primarily because of the loose monetary policies of the Fed," Bliss said. Because of this, plus some weaker-than-expected economic data released last week and a somewhat soft manufacturing sector, nobody believes the Fed will taper in December any more, he said.
Seasonally bullish time into year-end
Bliss predicted that the S&P 500 will probably finish somewhere between 1,770 and 1,820 points by the year's end, saying he would be surprised if the market pulls back lower than that.
"Momentum is building. It's not to the point where we can say it's going to take us to extraordinary highs, but it's building and something we should keep an eye on," he said.
Mark Newton, chief technical analyst at Greywolf Execution Partners Inc., said November and December are typically viewed as two very good seasonal months in each year for the equity market.
"We are in a very seasonally bullish time, and it typically doesn't pay to fight the market," he said.
"December has been very tough to fight. That's been a very, very bullish month over the time for U.S. equities. That's been up on 85 percent of the time over the last 50 years," Newton added.
He said investors got optimistic over equities as they are regarded as "the best alternative" to other types of investment which don't seem to be working now.
With the Fed problems postponed to next year, there are no road blocks whatsoever, he said.
"The trends right now are still positive. You have to take advantage of that until they show otherwise," Newton said, adding that despite how overbought a lot of these stocks have gotten, the trend still tends to favor stocks versus any other asset classes, at least in the short run.
However Newton pointed out that the "seasonally bullish" run into the end of this year will not go straightforwardly higher, but be "choppy." He expects potential weakness in the market between Nov. 20 and the beginning of December before the stocks rally in the final part of next month.
2013 Bull market not to be replicated
The U.S. stock market has staged a tremendous rally since the beginning of 2013 with virtually no major correction, with the Dow up about 22 percent year to date, the S&P up almost 26 percent and the Nasdaq up nearly 31 percent. Moreover, the bullish cycle has lasted five years -- since the financial crisis.
"Maybe the great things of the year might not replicate themselves next year, but again we see more upside than downside risk to the market," Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, said in an interview with CNBC.
Subramanian said economists from Bank of America remain "constructive" on stocks. Although the May-to-September pullback of the market might be "a little bit of a microcosm" of what the market will be next year as rates start to normalize higher, it is "a little bit too punitive" to see a correction around a possible taper from the Fed, she said.
"Because if you think about it, a taper is happening in tandem with an improving economy ... It's actually great for cyclical sectors," she said.
Newton, the Greywolf analyst, believes the tremendous rally this year is "certainly overdue."
"The market will suffer some correction next year, probably in the neighborhood of at least 10 to 15 percent. After that, we could potentially rally. But next year and even the year after have the potential of being below-average years," he said.
