10K Does
the Trick
By Duru
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
"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!)