Considering the Dow at 10,000
As the Dow Jones Industrial Average approaches 10,000, we can be sure that the media will represent a breach of that level as further signs of economic recovery. I consider such media-hyped milestones as generally unimportant in the long-term picture. However, from a technical perspective, round numbers can act as support and resistance, since many eyes will be watching as price approaches psychologically-significant levels. As the Dow tries to move over 10,000, CNBC will be providing the play-by-play, and traders will be placing stops both above and below.
At the same time, technical traders must consider the entire landscape, and should avoid attaching too much significance to a single technical factor. When considering the Dow, I generally track the Diamonds Trust ETF (DIA). Looking at DIA, the 100.00 price level roughly corresponds to the Dow 10,000. Taking a look at the DIA one-year chart, we can see the price has been trending higher since March, and is trading above its rising trendline. Price made a new high this week, albeit on lackluster volume. The 95-96.00 area is an area to look for support, considering the rising trendline, 50 day moving average, and prior low set on 10/2. In other words, we have a bullish chart here, with volume being the primary area of concern.
Looking at the monthly chart, we can see that price will run into the 200 period moving average around 106.00, provided it moves that high. We can expect this level to provide some stiff resistance for DIA in the event it rises above 100.00. Moreover, the monthly chart is certainly not bullish. We have a V-shaped move off the lows on steadily-decreasing volume as we approach the 200 period moving average.
All things considered, as traders we can use the Dow 10,000 level as one of many technical factors to influence our trading decisions in the short term. Long-term investors, on the other hand, should be very wary of this market, whether it trades above or below significant psychological levels. I continue to see this market as highly overvalued, propped up by government dollars and momentum. At some point the underlying fundamentals will assert themselves, and the market will again see considerable downside. Last week John Paulson’s Weekly Market Commentary was highly insightful. I have already re-read it several times, and plan to keep it close at hand for future reference. Here’s a sample, but by all means go and read the entire thing, and note that Paulson has been a star performer in this difficult market.
Many of my concerns about the markets in recent years have emerged because too often, financial market participants and policy makers focus on manifestations rather than causes and conditions. This is why investors produced the dot-com bubble, the tech bubble, the mortgage bubble, the debt-financed private equity bubble and the commodity bubble without thinking of the seeds of crisis that were latently emerging, or how violently they would manifest. Our policy makers have bailed out poorly run financials by creating massive federal deficits, and think they’ve solved the problem in the same way as someone who runs over a weed with the lawnmower. The roots have simply grown deeper, because the seeds are still there, but we’ve applied a few conditions in the opposing direction. Those of you who have read these missives for a long time know that my geopolitical views are largely the same. This is, because that is. This is not, because that is not.
We can have an overvalued market and the seeds of a bear market, but if we apply opposing conditions in the form of easy money in order to prop up the market and prevent the consequences of bad behavior, the seed will simply grow stronger, and its ultimate manifestation will be more powerful. We can have a mortgage market that is setting new records for delinquencies and foreclosures every month, combined with increasing unemployment and a heavy reset schedule on Alt-A’s and option-ARMs that is just now picking up. But we lower the bar on financial reporting, fail to restructure debt, and ignore the strengthening seed because we’re single-mindedly enthusiastic about the thin-rooted green shoots of stabilization – born solely of a burst of fiscal profligacy – then we’ll predictably be blindsided when the problems re-emerge.
Predictably blindsided. That’s happened again and again in recent years. And it happens when we fail to think about the seeds we are watering. If we look only for fruit and ignore the seeds of crisis, then every bit of fruit will be followed by crisis, and nobody will understand why.
