Dow 10 000: Why It Means Nothing, but Signals Something

"Dow 10,000!"
            - Various commenters and traders

Well, well, the Dow has crossed 10 000 for the first time in 377 days. The bulls are partying just like they did on March 29, 1999, 2 hours past noon, when the closing bell rang on wall street and the big number had five digits for the first time in history.



From then to now, a span of 3 852 days, the Dow is precisely at the same level, 10 000. How is this a cause for celebration and jubilance? This environment in the market is perhaps the most irrational in all of history, exemplified by this -- celebrating that over 10 and a half years, they made absolutely zero dollars if they invested in the Dow (or the S&P for that matter, and they would have lost money if they had the Nasdaq).

Sure, it is an important psychological tick mark on the chart, but what is the difference between 9900 and 10 000? A mere 1 percent.This is no more significant as if it went from 9300 to 9400, or from 9800 to 9700. Simply put, Dow 10 000 does not matter to an objective observer.

Dow 10 000 does matter, of course, to an observer that is not objective, like pretty much every single trader of stocks. Dow 10 000 is providing a morale boost to the weary bulls, and may trigger, as it did with S&P 1000 and Nasdaq 2000, a temporary spike in stock prices.

The rally looks like it is losing momentum and is topping out, but this circumstance may be temporarily defrayed by the tick above 10 000. Do not be fooled by this psychological booster. Expectations will (and already are) being raised to improbable heights, for earnings, economic growth, and stock market performance, and I do not believe they will be met.

If these are not met, then expect a downturn, be it in the form of an agonizing trickle or a terrorizing crash. The pattern for the rally is suspect, and it still does not feel right to me, whether the Dow is 4 digits or 5 digits.

Also, the celebration of zero returns is misleading. If you look at prices over the past 10 and a half years, even with BLS numbers, you now have 26 percent less purchasing power with 10 000 than you had back then. If you correct for distortions in the method of calculation (which push inflation measures lower), then your return from March 29, 1999 to today would be a whopping negative 50 percent.

Hardly a cause for celebration. Meanwhile, if you had invested in gold, your return would be, even after adjusting for inflation, over 450 percent. If you had invested in oil, your return would be 350 percent (or if you had cashed out at the 2008 high, 830 percent). If you had invested in the Euro against the Dollar, your return would be around 20 percent. Compare this to negative 50 percent for stocks, and you get a picture of the bleak situation the traders face even in this euphoric atmosphere.

In conclusion, expect a spike due to a temporary euphoria about Dow 10 000, but after ice-cold seawater is thrown on the euphoria when data disappoints, expect stocks to go much lower.