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March 1, 2011, 12:01 a.m. EST
By Shah Gilani
MIAMI (MarketWatch) "” According to legendary investor Sir John Templeton, "The four most dangerous words in investing are, it's different this time."
Now, as investors celebrate the doubling of the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,312, +5.69, +0.44%) since the market's March 2009 bear-market bottom, is a good time to question whether we're in dangerous territory or if it's indeed different this time.
The short answer is yes, it is different this time, so you can stop reading. But do so at your own peril because the long answer is that everything is different this time.
It's not that the laws of gravity, the propensity for markets to correct and consolidate, or that business cycles have been revoked. It has more to do with the law that a body in motion tends to stay in motion unless acted upon by an outside force.
I'm talking about momentum. This market has it. And only large outside forces are going to derail it.
What's different this time is that while the market has been rising, almost parabolicly, and could face bouts of profit-taking, what's driving it higher are different internal and external dynamics.
Don't overlook the market's good internals.
Earnings, a critical measure of corporate health, have been strong and rising. Even as they have been steadily advancing, price-to-earnings multiples indicate many stocks and the market itself is still cheap. The current PE on the S&P 500 is 13.5, which is below its historical average of 16.7. That means there's plenty of room for PE expansion before the market can be considered "fairly valued". By that measure we could advance another 24% and not be overbought.
The luxury of low interest rates and the necessity of belt-tightening have driven corporations to retool their balance sheets. They are sitting on almost $2 trillion of cash. That's different than previous cycles where they had actually leveraged themselves up.
A lot of the money that's been saved and raised by companies is being earmarked for dividend increases. That's another signal to investors that returns can be stabilized. Right now the dividend payout ratio on S&P 500 stocks is 26%, which leaves lots of upside if the payout ratio moves toward its 54% historic average.
External dynamics are different this time.
The biggest change is that for the first time in history the U.S. stock market isn't reliant on the U.S. economy.
What's different now and forever is that companies with global reach, those that sell their products worldwide and source raw materials, components, manufacturing and labor globally, are the companies leading the market higher. And that's not going to change.
While we keep hurtling forward and higher, we have to keep in mind what else is different this time. And that is that we live within a global economy now. We are not alone.
What's different this time is that the outside forces that can derail our stock market are actually outside forces. Things like other global stock markets correcting or crashing will affect us. Emerging markets' economic growth and inflation trajectories will affect us. Staggering amounts of our government debt being held by overseas investors, sovereign wealth funds and central banks will affect us depending on their disposition toward our deficits and our public debts.
This time it is different. Just remember that knowing what's different will make the difference between being in a dangerous place and a world of opportunity.
Because everything is different and that includes markets, to profit from continuing upward momentum I recommend selling the PowerShares QQQ /quotes/comstock/15*!qqqq/quotes/nls/qqqq (QQQQ 57.37, +0.53, +0.93%) May $56 puts for $1.25. If the Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,757, +19.40, +0.71%) is above $56 by May 20, 2011, you'll keep the $1.25 and make 100%. If the Nasdaq falls to $56 or below by expiration, you will end up owning the QQQ Trust at $54.75, which is about 7% below where it is now. I like this play because even if the puts lose in value and I'm assigned a position in the Trust, I'm getting in on a correction, which I like in what I think is a strong market.
Shah Gilani is contributing editor to both Money Morning , The Money Map Report , and is editor of the The Capital Wave Forecast newsletter. He does not have a position in the PowerShares QQQ.
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