Dow 11,000... Psychologically Important?

The drafting of our quarterly newsletter typically takes place immediately at the conclusion of a calendar quarter. This time our Spring newsletter, however, was delayed in the drafting stage for a variety of reasons that put us in the interesting position of watching the Dow Jones Industrial Average flirting with the 11,000 level. It "hit" that intraday mark on April 9 and officially "closed" above the level on April 12. So the question that arises once again is whether this is a purely psychological level, or a true market resistance level that, since broken, bodes well for sustaining the market rally that began last March.

Lest we forget, investors have been down this path dealing with the same question many times before. Just a reminder, but we had been at Dow 14,000 back in 2007, so it was raised at a number of levels... 12,000, 13000, well you get the picture! For the first few days following this month's breakthrough it appeared that momentum was clearly in place to sustain a market rally. Then, to draw on an expression we used long ago, the market encountered an asteroid event in the form of an SEC civil fraud charge leveled against Wall Street powerbroker Goldman Sachs. That was clearly something that the market didn't need at this time. It was starting to look like Main Street America was beginning to gain some confidence once again in our overall financial system, but the doubts are certainly rekindled with this serious charge.

If the market hiccups here and then continues to advance we can assume that there is still strength in the rally. If a pullback takes place it will be difficult to ascertain whether the market was just running out of steam anyway or whether the Goldman Sachs matter pulled the rug out from under the average investor and has them putting their money back under the mattresses.

We would like to believe that there is still strength in the markets. The first quarter had the three major indexes advancing with the Dow +4.1%, the Nasdaq +5.7%, and the S&P 500 at +4.9%. Market technical analysts are closely watching the developments of both the Nasdaq and the S&P 500. As for the latter, its July 2008 low of 1200 set the

stage for the market crash bringing it all the way down through the 700 level. While writing this newsletter we have been observing the movement just above and below that July level. With the strong first quarter of nearly 5% it might be a bit ambitious to expect a strong breakout above in the short run.

The Nasdaq, however, which had a July 2008 low of 2,167, has powered back here in mid April to as much as 16% higher than that benchmark date. The Nasdaq has been the market leader among the major indexes guiding the way to recovery and the hope is that this bullish pattern can pull the S&P 500 through what may be its resistance level.

Looking at other positive developments during the first quarter was the fact that retail and consumer discretionary sectors played a big role in the March market breakout that contributed to the strong first quarter results. These sectors are among the first to respond to an economic upturn, so if there is no major pullback in these areas this would support the case for at least a respectable economic recovery. Complementing these sectors would be the transport sector which has broken out to new 17 month highs. The reason that transports are another leading indicator is because raw materials need to be transported to produce finished goods and in turn those goods need to be transported to points of sale. A higher level of activity here reflects well on the sustainability of the economic upturn. Technical market analysts should be of the opinion that there are positive trends in place which can lead to further long term gains this year.

So as we wind up the writing of this cover article for this newsletter it is duly noted that the Dow remains above 11,000 signaling the hope that the Goldman Sachs asteroid event will not disrupt the markets momentum. Indeed, the Washington, D.C. politicians will have plenty to debate over, in terms of possibly introducing new Federal financial regulations, as a result of the SEC charge against Goldman. Hopefully that will not spill over to disrupt the recovery that the markets have achieved.

We tend to think that market movements are always a game of psychology anyway among its participants. So we really shouldn't get too "hung up" on this 11,000 plateau. Most importantly we need to continue to see strengthening in the economic data and slow, but steady, will be just fine!