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Dow 10,000. What Do We Do Now?

The DJIA closed above 10,000 today. This is the 21st time the DJIA has crossed through this psychological level. Fundamentally and technically the market is pushing the upper limit. After a seven month rally that does not seem to end, it raises the question - what do we do now? Continue to participate in the market, “holding our nose when we buy” with the expectation the rally will continue through the rest of the year. Or do we take further precautions on the anticipating a move down. Let’s look at a few of the factors and how we might go forward from here.
Many professional traders have been looking for a significant pull back that has not materialized. A number of them are below their benchmark performance level and they must make up for their poor performance by the end of the year. To catch up, they will have to buy on any dips. Most will buy into sectors and stocks that have been performing well lately. Look for them to add to the strength of the market through the rest of 2009. After that, they will likely curtail their participation as they reassess the state of the economy and the market.
The retail investor has stayed away after the plunge in the market in 2008 and early 2009. There are signs the retail player is returning to the market. When they do return, they bring additional money to the market. However, the retail investor is notorious for entering the market toward the end of a rally. Retailer investors can help the market expand for several months, chasing the hot stocks. Again, they will buy on any dip in the market as they join in the rally.
The Federal Reserve has been flooding the economy with money. This money needs to generate returns. Much of this money is finding its way into the stock market. Eventually, the Fed will reverse course and start to withdraw some of this money. When it does, it will act as a brake on the economy and the stock market. With unemployment a big and growing problem, the Fed is unlikely to start this process any time soon. While the market tries to anticipate when the Fed will start to tighten, I do not expect them to do so until the second half of 2010. The weak job picture will encourage the Fed to sustain the easy money policy until a turn in the employment picture shows up. As a result, I expect the market to enjoy the benefits of easy money though the end of 2009 and well into 2010.
The economies in Asia and parts of South America are recovering more rapidly than Europe and the U.S. This leadership will help companies that participate in these markets. Emerging markets have been rising, though some pundits are worried that bubble is forming. This is probably true, especially with all the stimulus money that has been made available from countries almost everywhere. This money will fuel growth in these countries for longer than many expect. As a result, we should expect to see the emerging markets to continue their outstanding performance for another 12 months, if not more.
Markets tend to feed on themselves on the way up as well as on the way down. The market wants to go up and it does not make sense to get in its way. At some point, we will encounter a final blow off leading to a more substantial drop than many expect. While this could take place at any time, for the reasons mentioned above, I suspect that we will not see such move until the first half of 2010.
As investors, we need to participate in this move up while taking appropriate cautions to protect our money should the move down take place sooner than expected. The best way is to take slightly smaller positions in sectors and stocks that have the best potential to maintain their momentum. Then take partial profits more quickly by selling half of the position once you have realized a quick profit. Use that money to move into other more promising opportunities. Let the rest run with good stop management to protect your profit. For all positions, keep your trailing stops in place to be sure you are protected from a sudden sell off. This way you can participate in the rally with lower risk of being caught in a sudden down draft. Stock picking and good trading discipline become even more important.