Dow 10,000 and More Irrational Exuberance

As April 2009 comes to a close it is already appearing like the Wall Street "cheerleaders" and the business media are beginning to talk the stock market up again.

April was Wall Street's best month in nine years -- offering some questionable evidence yet that maybe, just maybe, the economy is about to begin a turnaround. Or maybe, investors will start piling into stocks and funds just as they are about to top out.

The Standard & Poor's 500 index, considered the most reliable measure of the broader market, climbed 9.4 percent in April, its best performance since March 2000, the peak of the dot-com bubble. The Dow Jones industrial average shot up 7.4 percent in April, on top of a 7.7 percent gain in March.

"That's more than a relief for investors -- it's a potential economic indicator, because the stock market tends to get back on its feet before the economy does. In downturns over the past 60 years, the S&P hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak", wrote Tim Paradis, a business writer for the Associated Press, in an article he wrote April 30th.

"The market is saying that the economy would hit its trough this summer," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis who has spent 50 years monitoring Wall Street.

He's the same market strategist who is famous for saying, "It's the snake you don't see that bites you." Right now every snake and snake oil salesman wants us to believe the market is going to go higher and higher from here. Maybe they are right, but are you willing to gamble some of your net worth that they are?

After months of being fed doomsday scenarios, investors are now starting to take a look at stock market utopia. In this utopia, bad news, like Wednesday's dismal GDP numbers, don't matter.

Here, housing prices stabilize, banks are resuscitated, corporations offer positive earnings guidance, and economic data points start showing signs that things are actually improving and aren't just less horrible than before.

A total fantasy land? Maybe not, say some experts who believe the market's best-case scenario isn't too shabby.

"I'm very impressed at how strong the market has been in the past several days. We've had every opportunity to sell off," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "Objectively, you've got to be somewhat surprised by that and certainly impressed.

"Are we really seeing a bottom in the market or a substantial bear market rally?" he adds. "This looks more and more like there are some real legs to this thing."

This kind of "irrational exuberance," as the absent-minded Maestro Greenspan used to call it, can be a harbinger of a short-lived and unexpected pull-back in the stock market followed by a huge move upward like we had between 1996-1999.

"Are we going to get back to 14,000 on the Dow this year? That is highly, highly, highly unlikely," says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. "But you have to be realistic. If stocks doubled in the next five years, that's a phenomenal return from here."

Most experts interviewed by CNBC.com in an article Thursday indicated that the Dow's best hope would be about 10,000 by year's end. Goldman Sachs, meanwhile, is among those that have set a 1,000 target for the broader Standard & Poor's 500 index.

"Even then, such a move higher would reflect a 30 percent growth and come only under the most ideal conditions: Unemployment turning around, housing finally finding a bottom, a more positive earnings climate beyond the better-than-Armageddon results from the first quarter, and general signs of positivity from the economy in terms of production, inventory reduction and other key metrics."

Thursday's market action wasn't exactly proof that we're going to 10,000 before we retrace back to 7,500. But this market's ability to shrug off bad news and climb a wall of worry is very impressive and might last awhile longer.

All I can say is be ready to do some shopping this summer and fall if the mood on Wall Street sours for a few months. I can hardly wait to buy companies like NYX, EMC, CHK and COP when they get a bit deflated from their current levels.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: I'm not long any of the stocks mentioned in this article, at least not yet.

Comments

[Mad Hedge F...:]

Time to go. OK guys, it’s May. Go Away. I mean vamanos, andele, raus, ike nasai! You’ve just had the best two month run in 30 years. It’s time to sit down and smell the roses. Go climb that Alpine peak you’ve always wanted to attempt, finish off that basement, or take the misses down to Cabo. Maybe your nine iron needs some work. Whatever. There are no decent risk/reward trades in the market right now. All of my long recommendations, like emerging markets, commodities, crude, and junk bonds, are though the roof. My shorts have cratered, with the 30 year Treasury bond futures down a whopping 20 points, from 142 to 122. All of my longs are way overbought, and my shorts are oversold. I can’t in good conscience ask traders to just sit on big unrealized profits. Never slap a double in the face, especially in this environment. Nobody ever got fired for taking a profit. Always leave the last ten percent for the next guy. There is no law that says you have to trade every day of the year. Better to reestablish at better prices, like in August. If you strapped on any of these trades, the first four months of 2009 gave you a great year. If you didn’t, don’t break your back playing catch up. It’s not worth it. As for me? I’m going down to Vegas to shop for condos at ten cents on the dollar and do some actual gambling.

May 01 08:59 AM

[prairiedog555:]

When CNBC makes a prediction, either high or low, it is time to buy/sell.
I think I just heard the proverbial "shoe shine boy" give me a stock tip.

May 01 09:12 AM

[Old Trader:]

It struck me the other day, as I was checking earnings numbers, as they came out, how many of the "beats" were the result of cost cutting, while revenues were down, and in many cases, margins were compressed.

First, I think that perhaps many analysts had projected declines in various indicators forward (understandably), and when the rate of declines eased in some cases, the result was they erred on the downside, setting the bar too low.

Secondly, how much more "cost cutting" can companies engage in, before the cutting of fat becomes cutting of muscle? Its good business to become ever more efficient during difficult times, but there are limits to how much trimming is possible without doing long-term harm.

May 01 09:23 AM

[Mutual Fund...:]

I have been posting on various news articles for weeks that the DOW & TSX would probably establish lows at the 8000 ish level and move upward from there possibly on a somewhat bumpy road.

Whether the markets are up or down there are always sectors of the global market place that do well. All this info and more can be found on my web page as well. Peruse the entire site for areas of investment that may offer substantial levels of performance .

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On May 01 08:29 AM Cetin Hakimoglu wrote:

> Futures on a tear..so the more people doubt this bull market , the
> higher it seems to go. Dow 8500 seems attainable within a week, dow
> 10500 by end of year and 14,000 within 2-3 years. The economic and
> stock market recovery appears to be v shaped.

May 01 09:27 AM

[Maxe Paul:]

There are two things that is definately going to happen, one, the market will rally higher from here, and two, the market will ultimately go lower than in March later this year or early next year. This is a natural 3 wave ABC bear market, we are in the wave B rally.

All these "experts" comming out saying this is a new bull market have their heads up their arses, never listen to experts, always listen to "the authority".

Here is the AUTHORITY on the matter.
breakpointtrades.com/c...

May 01 09:40 AM

[Bull Run:]

My concerns, the market rising on low volumes, while normally it falls on low volumes,(weak interest brings weak prices),which indicate to me that the market is "old term" using boiler room tactics. Insiders are pumping up the action to entice investors from low risk into high risk investments. Noteable long term treasuries, which have been falling in price, and invest into stocks which have been rising. The other concern is the US dollar which is now facing the beginng of a LONG fall from grace, which puts more pressure on falling bond pricing,and ulitmately on the rising equity markets. The question is are we entering the beginning of the next BIG bubble,maybe the largest in history, as the US Feds are willing to inflate this economy at ANY and ALL costs.

May 01 09:42 AM

[Bandwagon2009:]

I guess we have not learned anything from the last two debacles -- i.e the two very loud bubbles bursting in this decade.

Lesson #1 -- stop listening to pundits on "live" media (incl CNBC) -- most of these guys know less about almost everything than they pretend (I know I am generalizing - so apologies to the few who actually know something) -- how do I know? -- in a different context, I used to be one. The pressure to say something smart or make predictions is strong, and you do get carried away.
Lesson #2 -- fundamentals, fundamentals, fundamentals...need to drive the market -- we still seem to be looking at the stock market as an uncorrelated / independent entity -- the whole idea that the market should (can) behave irrespective of how the rest of the economy (incl unemployment) is doing may be true but is the main problem with our current thinking (remember the sub prime problem)
Lesson #3 -- isn't most exuberance irrational ? the flip side is also true - we can't (to borrow a phrase) continue catering to the nabobs of negativity -- yes Mr. Roubini I am talking about you. Granted you were right, but let's not get the constant fear mongering create a self fullfilling prophesy -- in most crises the key ingredient to getting out is optimism (not exuberance, but a quiet steady, flinty optimistic outlook)...what did Gandhi, Churchill, Roosevelt, King, Dalai Lama and others have in common with the great capitilists of the world (JP Morgan, Andrew Carnegie, Henry Ford....) -- yep -- you guessed...

ok - time to get off my soapbox........

May 01 10:22 AM

[MGA_1:]

People are just hankering for a rebound in the economy. This looks to me to be a bear market rally that seems to have some real legs. DOW 10000 - could happen. I wouldn't doubt if this lasts into June or July.

May 01 10:54 AM

[Randall Arnold:]

Sucker's rally.

May 01 11:13 AM

[Econ 101:]

Lets shine some light on the cockroaches!

Support HR 1207, an Audit of the Federal Reserve

Find your congress person: www.house.gov/house/Me...

Why is BHO looking like Bush-Lite??
www.oftwominds.com/blo...

May 01 11:30 AM

[carey_jim:]

Usually, bubbles are popped by very tiny things like pins or flu viruses.

When everyone stampedes for the door at once, a lot of people are going to get trampled.

May 01 11:55 AM

[Marc Courtenay:]

I appreciate your thoughts. The evidence is "massive" indeed. Thanks


On May 01 08:11 AM dcb wrote:

> There is massive evidence of market manipulation all over the place.
> The fact that I can so easily see it means it's there. If you want
> a more rational market for trading compare the action of the FTSE
> with the S&P. It went up, dropped back to 50 day average (the
> long term buying Opportunity). never happened with S&P. Why,
> because one firms trading desk has greatly increased the Var of its
> trading portfolio and it trading 50% more than the next lower desk.
> SEC ain't going to do a thing, and they will keep running it up until
> the retail customer joins in the rally and then will sell.

May 01 01:23 PM

[Marc Courtenay:]

DEAR COMMENTS:
When I read all your comments I'm humbled by the fact that you all have contributed some important considerations and views that make the total value of all your comments even more helpful than the article I wrote. But frankly, that's why I write these articles. I'm just a facilitator and catalyst to bring our combined experiences and perspectives out on the table for us all to see. Thank you for your contributions, patience and candor.

May 01 01:34 PM

[Nathaniel C:]

Remember that in spring of 1930 the market rallied 58% but it turned out to only be a bear market rally. Nothing surprises me anymore in the stock market these days. Sure we could see 10,000 or 5,000. But for now the trend is up.

May 01 03:26 PM

[Stone Fox C...:]

Nobody believes in this rally. We had every reason for a huge selloff the last 2 days: Chyrsler BK and a delay in the stress test. Reasons that should've pushed the market below the technical sell point at 870 causing the market to crater, but every time the market rallied. The fundamentals and news might tell you to sell, but the market action sure suggests the opposite.

May 01 04:35 PM

[Market Sniper:]

We are in act one in a tragedy which will turn for the worse later in 2009. Nothing ever goes straight down without major corrections. We are in such a correction now. If we take the Dow Jones as an example we have only seen, so far, a correction up of circa 20% of the fall from October 2007. We could reach 10,000-10,300 on the Dow which would be a 50% correction. Bear market rallies are called sucker rallies for the simple reason that they suck everybody in and make everyone bullish before the market turns down again with a vengeance. A 50% correction in the Dow or any other stockmarket would of course be nice for anyone who still owns equities and intends to get out. But it is important not to get too greedy here since this is a bear market of a magnitude that we haven’t seen since at least the 1930’s. I still expect a fall from the peak in most stockmarkets of at least 90% in real terms , in the next few years. And remember that it took over 25 years for the Dow Jones to get to its 1929 peak after the bottom in 1932.

May 01 05:15 PM

[pimp:]

After the FED prints all this money, doesn't some liquidity enter the market?
If so this whole thing is like a crack cocaine addict smoking what's left in the pipe after running out of rocks.

May 01 10:34 PM

[User 305589:]

9000, 10000 Dow - well possible. Hold on to positions, but with ever tighter stops. It makes zero sense to jump into new positions after this bull-run, yet this is what a lot of people are contemplating here (fear of missing the next bull) and ultimately will really do. Dow 9000-10000 would be great - to cut positions big time and build cash. 3 months ago nobody could have enough cash and opportunities were everywhere. most people were either too scared or didn't have the cash to take advantage of them. Over the next 18 months we will have a similar situation again - with lots of opportunities while cash to buy them will be king again.This rally is a golden opportunity to rebuild and´rebalance the portfolio and to prepare for the real bottom - which may be years away.

On May 02 01:10 PM Freya wrote:

> The Nays have it by a vast majority, I excluded Marc's responses.
>
>
> Just based on your comments and the Fact that Indicators like "Sell
> in May" and go away prove to be wrong when everyone knows and quotes
> it, I have no choice but to continue to be fully invested on the
> Long side.
>
> Dow 9,000 before another steep drop.
>
> The results of the stress tests were leaked, Chrysler was telegraphed
> long before it happened. The Public is not participating, big deal.
> This is normal, they do not get in until near the top anyway.
>
> The US this and the US that, This "Bear Rally/Bull Trap" is Global.
> I can understand the normal corrupt, manipulation expected here.
>
>
> The up move started in Asia and Russia. Not here.

May 04 04:36 AM

[Freya:]

The Nays have it by a vast majority, I excluded Marc's responses.

Just based on your comments and the Fact that Indicators like "Sell in May" and go away prove to be wrong when everyone knows and quotes it, I have no choice but to continue to be fully invested on the Long side.

Dow 9,000 before another steep drop.

The results of the stress tests were leaked, Chrysler was telegraphed long before it happened. The Public is not participating, big deal. This is normal, they do not get in until near the top anyway.

The US this and the US that, This "Bear Rally/Bull Trap" is Global. I can understand the normal corrupt, manipulation expected here.

The up move started in Asia and Russia. Not here.

May 02 01:10 PM

[Mayascribe:]

I wouldn't have believed it either, but here we are.

Oct 16 06:14 PM