Full Speed Ahead

Yesterday we predicted that the Dow would move very quickly through the 10,000-10,300 zone and most likely overshoot to the upside. So far, so good. Monday’s 200-point move took the Dow up 2% to 10226, its highest finish of the year and its second 200-point up day in the last three trading days. This leaves the index just 28% below its all time high.
 
The nature of the intraday action yesterday was as expected, namely no selling pressure whatsoever. Let's review the technical, monetary and sentiment-based reasons to anticipate such a move at this time. On the technical side, the gap zone from October 2008 offers little upside resistance. On the monetary front, the weakening dollar boosts the price of hard assets, increasing the book value of equities. On the sentiment side, fund managers are both skeptical and afraid of missing out. On this last point, comments in the WSJ are instructive.
 
Ed Yardeni of Yardeni Research characterizes institutional and hedge fund managers as deeply skeptical, yet actively participating. The term he used was “fully invested bears." In other words, no one can afford to miss this rally. As we discussed in the Weekly TSR, government-supplied liquidity and stimulus have a much greater effect on equity markets than on the economy itself.

News yesterday that the G-20 finance ministers believe that the fragile global recovery requires continuing stimulus provided an additional tailwind. We expect that small doses of good news from consumer-related companies this month will support the rally. Our target is Dow 10,300 and then Dow 10,500.

It is gratifying when the market closely matches our predictions, both in time and in price behavior. Yesterday was one of those days. We think the Dow will reach 10,300 and then proceed to 10,500.