What does it mean when the Dow crosses another milestone, as it did this week by finishing around 13000? Both a lot and not that much.
Prices don't exist in a vacuum, but within the context of their history and that of other asset classes. So while there's nothing particularly notable about Dow 13000 -- certainly no more than Dow 12950 or 13025 -- prices are an indicator, really the only indicator that matters. Attention must be paid.
Dow 13000 is the mass-media-worthy demonstration of what market watchers have seen for months: stocks are once again a legitimately strong asset class after years or erratic, disappointing returns. Dow 13000 simply fits more neatly into a headline than "Industrial Stock Index hits 44 month high." If you've been following the market, not the headlines, it shouldn't be that much of a surprise.
Notice I characterize the market as "strong" rather than "high." With large-cap names like Microsoft (MSFT),
As we wrote a few years back, gold seemed "high" at $1000 an ounce too, and it wasn't too long ago when $50 was referred to as a "ceiling" for oil. Prices now trade at more than double that amount.
Because trends tend to persist and the most recent market info is also the most influential, one can infer stocks are likely to continue higher, at least for now. Supporting the trend is recent data from Investment Company Institute, which shows investors withdrawing $322 million from domestic mutual funds last week while plowing $8.4 billion into bonds. That suggests more doubt, which is bullish, rather than hope, which is not.
You'll often hear analysts refer to a particular price as being "important," whether it's a stock's 200-day moving average, previous support or resistance or another seemingly arbitrary point. In reality they're all important, but not in isolation as one point on a chart, but how Dow 13000 -- or any particular price -- fits into a greater context of market trend. As has been the case for months, that trend is clearly up. Why fight it?
When asked what the stock market will do, financier J.P. Morgan famously replied that "It will fluctuate", a maxim as true at Dow 13000 as it was near Dow 80 back when he said it. To that end, sound technique, including position size and risk discipline, are always the key determinants of success. But Dow 13000 shows us, in no uncertain terms, that equities are no longer the pariah of an asset class they've been for the past few years. That you can't ignore.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC