The stock market’s strong start to this year has created challenges for those of you who have been looking for opportunities to buy stocks. It is particularly challenging for those of you who have purposely kept your allocations to equities low. Do you buy stocks now or do you wait for prices to fall?

Unless you have confidence in your ability to predict the short-term direction of the market, you should buy whenever you find a good stock trading at an attractive price. Yes, you are taking the risk that the stock could drop in value soon after you buy it, but if you don’t buy now, you risk having to pay an even higher price for the stock in the future.

I realize that there are still concerns. The latest debt deal for Greece provides no assurances that yet another rescue package won’t be needed in the future. Oil prices are on the rise because of tensions with Iran, and the latest comments by Supreme Leader Ayatollah Ali Khamenei won’t help calm fears about the country’s nuclear ambitions. The U.S. economy continues to grow at a slow pace. Plus, forecasts for corporate profits are falling. Since the start of January, the projected 2012 earnings growth rate for the S&P 500 has been cut from 8.09% to 5.97%.

There are also many positives, however. The economy is expanding at a rate that is strong enough to suggest a double-dip recession is not forthcoming. Valuations are still reasonable. Relative to Treasuries, the earnings yield (earnings per share divided by the share price) favors stocks. Plus, several other indicators are positive including the golden cross (the 50-day moving average for the S&P 500 crossed above the 200-day moving average a few weeks ago), the January Barometer, the Super Bowl Indicator and the Sports Illustrated Swimsuit Issue Indicator. (The U.S. markets perform better when an American graces the cover, according to Bespoke Investment Group. This year, American Kate Upton is on the cover.)

(The relation of the Super Bowl Indicator and the Sports Illustrated Swimsuit Issue Indicator to stock market performance is oddly coincidental, but it never hurts to have a bit of extra luck on our side.)

As far as investing after a run in stock prices has occurred, the historical data suggests you could be rewarded for doing so. A report published earlier this week by Sam Stovall of S&P Capital IQ looked at portfolio returns for a $10,000 investment made on December 3, 1999, in the S&P 500. Regardless of whether the entire amount was invested on that day or invested over a period of time, the portfolio rose in value if dividends were reinvested. (I intend to publish the study, which compares dollar cost averaging to lump-sum investing in the April AAII Journal).

The Stock Trader’s Almanac looked at past years with a strong start. (We are in the midst of the 11th best start for the S&P 500 since 1930 and the third best start to an election year since 1930.) What they found is that strong starts result in full-year gains, but volatility—both to the upside and to the downside—often ensues after the first quarter.

This all goes back to what I said at the beginning: Whether you buy now or wait, you are incurring risk. Unless you are confident about your forecasting abilities, you may do best by buying when you find an attractive stock trading at a good price.

More on AAII.com

• An Intro to Moving Averages: Popular Technical Indicators – I mentioned the golden cross above, a pattern based on two moving averages. Moving averages illustrate the trend in a stock’s price movement, as this article explains.
• Four Fundamental Tests Every Stock Investor Should Use – These four fundamental characteristics can help determine whether a stock is attractive or not.
• Oddest Market Indicator? – What is the oddest, or the most random, stock market indicator you have heard of? Tell us on the AAII Discussion Boards.
• Don’t forget to take the Sentiment Survey.

The Week Ahead

Approximately 15 S&P 500 member companies will report earnings next week. Included in this group are Priceline (PCLN) on Monday, El Paso (EP) on Tuesday and Edison International (EIX) on Wednesday. No Dow components are on the calendar.

The week’s first economic report will be the National Association of Realtors’ January pending home sales index, which is scheduled for Monday. Tuesday will feature January durable goods orders, the Conference Board’s February consumer confidence survey, and the December S&P/Case-Shiller housing price index. The first revision to fourth-quarter GDP, the latest periodic Beige Book and the February Chicago PMI will be published on Wednesday. Thursday will feature January personal income and spending and the February ISM manufacturing index. February employment numbers will not be released until March 9.

Several Federal Reserve officials will make public appearances. Cleveland President Sandra Pianalto will speak on Tuesday and Thursday. Chairman Ben Bernanke, Dallas President Richard Fisher and Philadelphia President Charles Plosser will speak on Wednesday. Atlanta President Dennis Lockhart and San Francisco President John Williams will speak on Thursday. St. Louis President James Bullard will speak on Friday.

AAII Sentiment Survey

Both bullish and bearish sentiment showed small increases in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.0 percentage points to 43.7%. This is the ninth consecutive week and the 10th out of the last 11 weeks that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 1.9 percentage points to 28.8%. This is the third consecutive week that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 0.9 percentage points to 27.5%. This is the third time in four weeks that pessimism has been above 25%. Nonetheless, bearish sentiment remains below its historical average of 30% for the eighth consecutive week and the ninth out of the last 10 weeks.

Though bearish sentiment is at now at an eight-week high, individual investors in aggregate expect stock prices to move higher over the short term. Signs of an improving U.S. economy are overshadowing worries about contagion from the European sovereign debt problems.

This week's special question asked AAII members for their thoughts about the low levels of volatility the market has been experiencing and how it is impacting their sentiment toward stocks. Responses varied. Some respondents viewed the low volatility as a sign that stock prices will continue rising, while others worried that it is a warning sign of a forthcoming pullback. Some respondents said it is indicative of many investors staying on the sidelines.

Here is a sampling of the responses:

• “Low volatility tends to reduce risk and fear, which encourages more money to come into the markets.”
• “Low levels of volatility are frequently a characteristic of market tops, as complacency overwhelms greed.”
• “It seems that stock prices have tuned out the news headlines lately, especially those having to do with Europe. It’s a much tamer market, and I like it.”
• “Volumes traded are more modest, which may be a reason for the lower volatility.”
• “Low volatility is okay with me. I depend on dividends, not capital gains.”

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor