Wednesday, September 9, 2009

Fed Slows Rally; Re-Examining Dow Theory

Those of us over 30 years of age remember the stock market before the advent of internet trading. If you're over 40, you can recall what the stock market was like prior to CNBC. If you're over 50, like me (disclosure: I turn 56 in December, God willing), you can recall much of what the market was like in the 1960s and 1970s, when investing was done mostly by a well-heeled, upper crusty wealthy class of people.

First there were mutual funds, which brought the average Jane and Joe into the stock trading mix, followed about a decade later by IRAs and 401k retirement plans which got more people into the game, circa 1974. Now, as they like to say in poker rooms, we're "all in" the stock market, thus the 24-hour coverage, unlimited internet access to trading, insight, chat rooms, etc., and the requisite madness that ensues when large funds jump in or out of positions.

With everyone (well, 60-70% of the adult population) now focused daily on what the stock market does, the indices have become less predictive and more reactionary. Witness today's release at 2:00 pm of the Fed's Beige Book, which outlines the economic landscape in the twelve districts of the Federal Reserve Bank. All the indices were sporting healthy gains (the Dow was up more than 60 points) when the data was released, but by 2:20 most of those had evaporated into thin air. After 3:00, however, investors saw more optimism than at first blush and moved the averages higher for the 4th straight session with the 9500 level on the Dow serving as support.

The Fed governors were not very enthusiastic in their assessment of the economic situation as of the end of August, but it was a rather measured account, with many of the regions showing increased activity in manufacturing and some stabilizing of prices in residential real estate. Consumer sales, however, were slow, and commercial real estate continues to slump. Overall, it was a pretty bland, mixed report, with little news and investors took it in stride.

Today's actions gets us back to our core argument: that the markets have become more reactionary rather than predictive. Little jolts of news bites over CNBC rattle traders in one direction or the other, with little to do with fundamentals. It's almost as though a third-grade mentality has permeated the caverns of commerce.

Nonetheless, the markets droned on today, stopping short of the Dow 2009 high (9580), which brings into play another burning question: are we in a new bull market or is this a bear market rally?

A few weeks back, I looked over the data from the past two years and determined that stocks may have to move higher - especially the Dow Jones Transports - to declare a new bull, but after closer inspection, I am going to make the call that we are already in a new bull market. Now, if I am wrong, recall that Richard Russell, the publisher of the "Dow Theory Letters" and a man for whom I have tremendous respect and admiration, actually made a bad call in 2007, declaring that we were not entering a bear market. It took a year, but the evidence was more than convincing that Russell was wrong. So, should my call prove to be off, be reminded that even the most astute and brightest people sometimes err.

To save everyone from the boring details of my analysis, here are the facts:

9034.69 was the recovery high for the Down Jones Industrials on January 2, 2009. 3717.26 was the January 2nd, 2009 recovery high for the Dow Jones Transports. Both of these numbers came after the second wave of the bear market, the most tumultuous part, from September to November, 2008. The initial phase was from October 2008 to September 2009, and the final leg was from November, 2008 to March, 2009. Anyone still thinking a double-dip downturn is in our immediate future better pay more attention to details. The third leg of the bear ended March 9. Today is the 6-month anniversary of that turning point. The Dow Jones Industrials entered bull market territory on July 23, when it closed at 9069.29. The Transportation Average confirmed when it finished business at 3749.58 on August 7. So, we've been in a confirmed bull market for more than a month already. My apologies for getting it right so late, but at least I now have it on the money.

Dow 9,547.22, +49.88 (0.53%)
Nasdaq 2,060.39, +22.62 (1.11%)
S&P 500 1,033.37, +7.98 (0.78%)
NYSE Composite 6,772.40, +46.33 (0.69%)

Our simple indicators are now screaming BUY. Advancers beat back decliners, 4556-1863, and new highs bested new lows, 316-62, the largest margin in two years. Volume turned up strongly after the Beige Book release, though most of it was on the NASDAQ. Much of that sell-off was likely repositioning, and traders got right back in later in the session, albeit in different stocks, shifting mostly from energy and consumer discretionary into materials, industrials and financials, though all twelve sectors showed gains.

NYSE Volume 1,329,853,000
Nasdaq Volume 2,524,738,000

Commodities took the worst of it as crude oil gave back larger gains to finish at $71.31, up a mere 21 cents. The level between $68 and $75 has maintained for weeks now, and that may be regarded as a benchmark pricing point. There is still simply too much slack demand for any further price appreciation in oil. Natural gas is also stuck below $3.00 and should remain there for at least another 6 months. There's nothing better than cheap fuel to hasten a recovery and prices should remain muted. So too with gold, which lost $2.70, to finish at $997.10, and silver, off 4 cents, to $16.47.

Those new high-new low figures are simply stunning. One should expect a major breakout any day with a quick run to Dow 10,000 by no later than October 10. All of the elements are lining up for a solid recovery. Dow Theory has confirmed, simple indicators have confirmed. What else need I say?
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