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Dow 10,000: Time For Euphoria Or To Run For Cover

|Includes:SPDR Dow Jones Industrial Average ETF (DIA)


 

Last week the Dow Jones Industrial Average passed the 10,000 mark for the second time on the way up.  The first time the market closed above 10,000 was in October 2008.  Wall Street celebrated with traders tossing commemorative caps and uncorking champagne.  This time around the feeling was much more like that of relief.

According to Arthur Hogan, chief market analyst with Jeffries & Co. in Boston, "It's almost like an announcement that the bear market is over."  But is the bear market really over? 

Obviously it's hard to argue with the type of run up the markets have seen since the March lows.  Is this the beginnings of a new bull market phase or purely a bear market bounce?  Truth be told, no one knows for sure, except God, and he's not talking.  So as investors, how should we be positioned?

The simple answer to this is to be skeptical, guarded, but realize that the market is a wild, untamed beast and if it wants to go up.....we must learn to accept it and participate.  As trend followers, we have learned to sit back and let the trend be our friend.  The current trend is up as one can plainly see.


 

However a closer look also reveals some cracks in the market's armor that should cause investors to be guarded.  First, we really haven't had a sizeable correction in this market move.  A sizeable, normal correction is a 33-62% retracement of the move.  This speaks to the strength of this move.

Second, technically price action is rising within what is called a "rising wedge."  This pattern is typically bearish and a break of this pattern should lead to a more sizeable retracement (33-62%) or possibly the end of this move.  See Dow graph below.

Finally, most bear markets start with a strong inpulsive move down.  This is followed by a strong, upward retracement move and then finally a longer, recessionary move lower.  If this market holds true to historical form, we still have this latter down move to come.  Will it?  No one knows for sure, but if history tells us anything it's to have our guard up while still partying with the Dow 10,000 crowd.

Stocks: DIA