10K Does the Trick
April 21, 2005
Well, I'll be! It occurred to me late last night to check on whether the Dow Jones Industrial finally tapped the 10,000 (10K) level. And sure enough…The Dow gave that psychologically sensitive level a nice, gentle kiss - like two long-lost lovers - and today ran faster than a thief on his wedding day! What an amazing bounce today in all the major indices, and the Dow's rejection of 10K led the way. Everyone was celebrating the latest manic behavior of the markets. No one can really explain why today the market chose to ignore all the dour news that had it selling off just moments ago. Was it the positive earnings of Nokia, Motorola, UPS, or Cummins Engine (cyclicals are BACK!)? Was it the awful news from the financial sector in the form of Capital One Financial and MBNA Corp telling us that the worst must be behind us? (Kudos to the American consumer for actually paying down their credit cards in large numbers). Or was it some economic report like the Philly Fed announcing that business is all good out there in the Northeast? (Never mind that this gives the Fed more evidence that rates can keep going higher). Who knows? What I DO know is what Greenie said today in testimony with the U.S. Senate Budget Committee:
"The combination of an aging population and the soaring costs of its medical care is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate" and finally, most horrific of all….
"So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for these programs will exert intense pressure on the federal budget. Indeed, under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. But most important, deficits as a percentage of GDP in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse."
Is this any reason to celebrate? I beg to differ! I have often criticized the Fed and their main man Greenie, but these dire warnings are spot on. Amazingly enough, I read rationalizations of the market's jovial mood that interpreted Greenie's testimony as "generally upbeat" ("Dollar Moves Up On Strong Data, Climb by Stocks", Dow Jones Newswires, April 22, 2005). Huh?! Sure, Greenie pooh-poohed the prospects for stagflation and used "reasonably good" to describe the economy. So I suppose we cannot blame the market for rallying on what it thinks is good news and ignoring the reality that an upbeat Fed is a Fed on the inflation beat. It is about time for a serious celebration.
Why do I maintain cynicism? Well, I just noticed that both the Dow Jones Industrials and the Dow Jones Transports last week broke below their respective 200 daily moving averages (DMAs). Dow Theory tells us that such a tango confirms a bear market is underway. This signal worries me because the 200DMA is considered a long-term form of support. When an index drops below, it is typically time to sell, and when it pops above, it is time to buy. Today, the Transports popped back above this important level, so there could still be some hope if the Dow Industrials can follow suit soon.
Finally, let us give a hand to IBM. This long suffering stock has FINALLY printed some green and a positive close for the first time since the last day of March. Now that is something to celebrate.
As always, be careful out there! (But don not forget to watch the fireworks in Google tomorrow!)