Analysis: Meltdown 101 - Is Dow 10,000 important?

It's time to look in the closet for that crumpled Dow 10,000 cap.
AUG 27, 2009
By  Bloomberg
It's time to look in the closet for that crumpled Dow 10,000 cap. The first time the Dow Jones industrial average entered five-figure territory, corporate bigwigs tossed hats that said "Dow 10,000" to cheering traders on the floor of the New York Stock Exchange. That was a decade ago. Traders could soon see 10,000 again soon, but any celebrating would be more a show of relief than an expression of brimming confidence. The Dow stands about 500 points shy of the 10,000 mark, putting the milepost on investors' radar for the second time in a year. In October, the Dow tumbled below that mark as traders saw an already weak economy come to a jerking halt. Now, the stock market is in the sixth month of what investors hope will be a lasting recovery on Wall Street and in the economy. So 10,000 is, once again, in sight. But what would hitting that mark mean this time, if anything? Analysts say it's mostly a psychological barrier, but it could draw more attention to the enormous run in stocks since March. It could also fan skepticism about a market that some analysts say has gained too much, too quickly. Here are some questions and answers about what it would mean for the Dow to hit 10,000. Q: When did the Dow first close above that level? A: After several tries, the Dow finished above 10,000 on March 29, 1999, in the midst of a powerful market rally that would end with the dot-com collapse at the start of this decade. Q: What would Dow 10,000 mean this time? A: Some analysts say it holds little significance given how far the market remains from its peak almost two years ago. But many contend that seeing Wall Street's best-known thermometer roll back to five digits could inject traders with confidence. "It's a like a century rather than 99 years. There's not that big of a difference but there's a big difference psychologically," said Dan Cook, senior market analyst at IG Markets in Chicago. Q: What would it mean for the market's recovery? A: The Dow is down 32.6 percent from its peak of 14,165 in October 2007. At 10,000 it would still be down 29.4 percent. Other indicators that traders tend to pay more attention to, like the Standard & Poor's 500 index, are also down by similar amounts. Q: Should a climb past 10,000 make investors more confident? A: Analysts are divided. But it would certainly feel better than when the Dow skidded 370 points on Oct. 6, 2008, to close below 10,000 for the first time in four years. By March, the Dow had tumbled to a 12-year low of 6,547. That was a drop of 53.8 percent from its high. Some analysts say, though, that reaching 10,000 would make them nervous that the market was overheated. "I'd rather almost hit the March lows again before it hit 10,000 because I do think we have run ahead of ourselves," Cook said. Q: What would be needed to push the Dow above 10,000? A: Investors will need to see more signs of an improving economy, because the stock market tends to bounce back as the economy is getting ready to recover from a recession. Investors need reassurance that they've been right to buy into the market. Recent economic readings on housing, employment and the economy's output have signaled that the longest recession since World War II, which began in December 2007, could be ending. "It's good news that the market has reached 9,500, but it's particularly good news that it's confirmed by most of the important economic numbers that we're looking at," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, N.Y. "It's not fanciful or whimsical or sheer speculation," he said, adding that some doubters have missed the rally. "The market is right; strategists, economists and individual investors have been wrong." Q: Should average investors prepare in some way for the Dow at 10,000? Should they even care? A: Long-term investors shouldn't react to day-to-day moves in the market, but it could be a good time to prune portfolios. Most financial advisers say it's wise to pull money from the strongest performers and funnel some of it to other investments. That helps guard against letting one part of a portfolio carry too much weight. Q: What if the Dow doesn't hurdle 10,000? A: If weeks and months go by and the index hasn't cruised past that number, some investors will see that as a signal that the rally is over. But keep in mind that stocks paused in June before surging again in July. Some analysts say a time-out is what stocks need after the Dow surged 45.8 percent since March — the kind of gain that might take investors five years to amass in less volatile periods. Q: If the Dow does reach 10,000, how soon might we see another notable number? A: Cook contends that a number like 10,500 could come within days because short-sellers — investors who try to make money by predicting that stocks will fall — could get spooked by the Dow's ascent. As worried short-sellers buy stock to cover their bets, the market could get a boost. Q: What could blow the market out of the water? A: It's impossible to say what could upend the rally, but analysts caution that any big disruption in the economy's recovery — like new waves of foreclosures or jumps in unemployment rolls — could send stocks tumbling.

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