Does the Dow Really Discount Everything?

  • Posted on: March 20, 2010

Dow Theory states that the Dow acts as a forward looking indicator. Thank you Charles Dow for being the father of something as murky and uncertain as technical analysis of markets. If Economics is the dismal science, technical analysis and the ‘random walk theory’ are a close second. Both economics and technical analysis are rife with Monday morning quarterbacking. Its just the nature of the beast. We look to read the tea leaves, and we base our anticipation of future events based on how the market has reacted in the past. Period.

Friday, March 19th, the Dow Cash got to within 181 points of printing 11,000. Do you really think that we will not go up and get that 11,000 print on the tape? I can’t imagine not getting that print in the next ten trading days.

Either way we should get it. A short covering rally could get us there. Longs may try to push us up there to see if we can set off some buy stops. A flurry of buy stops above 11,000 will have two outcomes. The first, is that it will signal a short term top, with shorts returning to punish bulls who have come to the party too late.

Or, the market will rotate up to 11,000 as a new trading pivot. If we can get some good consolidation without a major retracement being sparked off, then I think we continue to climb the wall of worry higher.

Personally, I am leaning towards the second outcome. I think we have a ways to go with this creeping rally. If the money on the sidelines decides to jump back into the fray, it should provide the buying boost we have yet to see over the past year of worry.

As of today, Saturday March 20th, it looks like the Dems have done enough horse trading and promise making to get their HISTORICAL, LANDMARK bill towards the eventual nationalization of health care. No public option, but definitely, that will be on the horizon after this historical move.
For better or worse, people voted for ‘hope and change’, well, America, this is what you’re gonna get.

How will it impact the markets? Honestly,I think we’ve already discounted the inevitable passing of this bill. At 2000 pages, no one really knows what’s in it. If its like other legislation, this industry will spawn a whole new group of ‘experts’ who will charge a fee to navigate around the b.s. Just like lawyers, accountants and estate planners exist to circumvent the glitches in that ‘system’.

Caterpillar came out Thursday, stating that this new health plan will cost them 100 MM dollars extra a year. Well, why not? lol This is the democratic socialist platform. Re-distribute the big pie. Problem is, the pie has stopped growing. And taxing the shit out of productive successful companies is really the only way to pay for everything. Pure and simple.

So for better or worse, we are going to have a national health care system. Whether or not the Dems survive the mid-term election is any one’s guess.
I predict that this new health care program will be the lightening rod for the next 5 years of election cycles. By 2020, we will all be entirely fed up with hearing about how this will play out.

As for the Markets, I would argue that indeed, they have discounted this inevitability. There will be an initial spike down, most likely, Sunday night/Monday morning. We may even see a large correction.
No one knows.

I still think that we are mired in a sideways to higher trade, with money sitting on the sidelines waiting for an excuse to get long. If we don’t have a total 10 or 20 percent pullback after the passing of this legislation, I would argue that the money on the sidelines will throw in the towel and jump back in.

Can you really imagine any more negative a story for business in America other than, “congratulations, you have national health care… Now start writing checks”….If the market can discount this piece of negativity and hold reasonably strong, then I would argue that indeed, the worst is most likely behind us.

In no time flat you will have Time putting Obama on its 2010 “man of the year” issue. They won’t even wait for December. Christmas will be in May this year for the Dems if the market shrugs this latest bit of social engineering.

I wonder if they will have Obama with a cowboy hat on his head or in his hand when they draw the cartoon of him riding the bronco or bull from 6450 up to 11,450.. Either way, if we can shrug this bit off, we will see that cover.

So what if the market doesn’t like the new national health care bill? Well, it could be the catalyst to throw us back down to the 50 percent retracement of the one year 4500 point rally. That is roughly the 8600 level. Won’t that be a roller coaster down if we see that?
Barring such a correction, I think we limp sideways to higher.

As for the grains, planting intentions on the 31st is our next chance for some volatility either higher or lower. Ditto for cotton and cattle. If you’ve been watching those markets, we are at some pretty high prices. Can anyone say ‘inflation’? More likely, its stagflation, ala Jimmy Carter in 1976 through 1980. Inflation marked by low growth.
Maybe Obama will break out the old WIN button’s from Jerry Ford’s administration. Whip Inflation Now,… I can’t wait.

Remember 2007 when the corn was locked limit down for 2 days after the plantings intentions report. No one expected that move either. We are only 7 trading days away from Wednesday March 31st planting intentions.

Use protection. Use stops. Trade small, have a ball.
That is all.

Good Trading