Selected Analysis and Commentary
Megaphone
Monday, December 14, 2009
The Dow was up another 64 points on Friday, which takes it within 45 points of a new yearly high. This is impressive, considering that the Dollar Index also advanced 0.6% that day. The decoupling of the Dow from the Dollar is a significant development. They have been trading in a closely correlated inverse relationship for months.
Anecdotally, there is a great deal of skepticism about the market being able to make a new high here. Picking tops, however, is often simply an expression of unrecognized investor fear. So far, the Dow has not done anything particularly bearish. Were this 3-week consolidation happening early in a rally, few would be concerned.
The fact that it is happening when so many have profits to protect raises the stakes and can trigger emotional thinking. Emotional thinking is the process of rationalizing emotional biases.
This morning index futures are up for two reasons. First, Abu Dhabi is lending Dubai $10 billion so it will not have to default on a government-backed bond that comes due today. The global financial system requires a certain level of trust to operate. When that trust is undermined, as it was last year at this time, not only do interest rates and credit default swap rates go up, but banks become more risk averse. The entire financial system becomes sluggish. The 11th hour rescue sends a message that the system still has integrity.
Additionally, Citigroup announced that it will pay back $20 billion in TARP funds. This move was expected, but it contributes to the positive mood in the financials.
Lastly, President Obama is meeting with Wall Street CEOs today to attempt to get more cooperation on financial reform. We would expect a private tongue-lashing and then a public show of solidarity. Markets could rally at the handshake fest and photo-op.
MARKET CALLS
The Dow rallied to within 45 points of a new yearly high on Friday. The 3-week consolidation has formed a ‘megaphone’ pattern in the index. We expect a test of the upper boundary today. If the Dow can close strongly, much higher levels then come into view.
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