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360 Degrees of the Dow

RealMoney Staff

Editor's Note: In this edition of "360 Degrees," RealMoney commentators cast a jaundiced eye on the rise of the Dow Jones Industrial Average toward a new high. What does it mean for investors and the market, and what is being missed amid all the hoopla?

TheStreet.com has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions. In that spirit, we bring you "360 Degrees."

"360 Degrees" is a feature that takes advantage of our varied stable of contributors to RealMoney, who offer analysis of stocks and the markets from all angles -- fundamental vs. technical, short-term trader vs. long-term investor.

Click on the following link for information about a free trial to RealMoney.

Leaning a Little Bearish, by Cody Willard

Originally published on RealMoney on Sept. 27 at 11:11 a.m. EDT

It's a big morning in the markets, at least according to the media. Like Rev Shark, I'm rather dismayed at all the attention being paid to the Dow Jones Industrial Average's progress toward its all-time high. Go to any financial-news Web site and you'll see a screaming headline in big font about how the "Dow Closes In on Record."

Rather than focusing on the symbolic record, I'm going to go TA on you. Will the technical analysts hate the Dow's chart if it can't push through this level with some gusto? Won't they call it a long-term failed double-top or something?

Gun to head, I'm starting to get bearish for the near term again. It sure seems like the bulls have all but declared victory and clear sailing for as far as the eye can see. And the bears are in hibernation, scarred from the big moves since July and scared to talk their book, much less to put on more shorts.

I'm looking at some index puts, probably in the Nasdaq or the Semiconductor HOLDRs (SMH Quote), to hedge against my long exposure.

At the time of publication, the firm in which Willard is a partner had no positions in the stocks mentioned in this column, although positions can change at any time and without notice.

Rest and Resume, by Dan Fitzpatrick

The daily chart shows an advance that's a bit long in the tooth. After bottoming in July, the Dow has run almost 10% without a major pullback. But there is no denying the uptrend, and all we have is conjecture about a potential pullback. But with that said, I see the greatest short-term risk being to the downside. As I look at the price action, I just don't see prices continuing to move higher without a rest. A mature price pattern like this only occurs after a period of sustained buying. So who's left to buy? Short term, I'm waiting for a pullback.

The weekly chart confirms this analysis.

I've drawn a "V" around each major bottom of the past few years. Notice how subsequent price action has almost always offered a second chance to buy at lower levels. I think the challenge for traders is to avoid being so bullish after a prolonged uptrend.

Yes, the trend is higher -- but as I have said many times before, the key question to ask is simply, who is behind me? At this point, not too many potential buyers are likely to be hanging around compared to the number of potential sellers.

But let's zoom out to a monthly time frame and look at the big picture.

The monthly chart is quite bullish. From late 2004 through 2005, the Dow pretty much traded sideways, creating a long period of low volatility. This 12-year chart shows that such low volatility has been fleeting. Given this, I expect this new uptrend to last through 2007.

However, the Dow is currently right at the upper end of the channel. I think we'll get a better chance to buy during the next month or so.

A Tribute to Caterpillar, Altria and United Technologies, by David Merkel

Originally published in Columnist Conversation on Sept. 27 at 11:45 a.m. EDT

Over the last six-plus years, (in order) Caterpillar, Altria, United Technologies, 3M and Boeing rescued the Dow Jones industrials from obsolescence. Take the performance of the top three away, and the Dow would be around 10,450, which would be closer to the performance of more broadly representative indices like the Wilshire 5000, off 9% from its peak, or the S&P 500, off 14% from its peak.

Part of what this points out is, with the exception of Altria, the Dow has been led over the last six-plus years by a gaggle of industrials, and dragged down primarily by big-cap tech (IBM and Microsoft), General Motors, the old AT&T and Kodak. It's interesting to see what goes in and out of favor; personally, I would expect that over the next six-plus years, a new group would lead in relative terms. Maybe it will be tech, maybe it will be energy and materials. Who can tell?

The DJIA was a state-of-the-art index in the era before computers, but when we can crunch the numbers easily, an index where you add up the prices and multiply by a factor is quaint at best. All of the fuss over it possibly closing at a new all-time high today is more notable for the media hoopla going on around it than for its true significance to the market as a whole. But if you look under the hood, the path of the Dow over the past six years is a tale of what industries performed well, and which didn't. That's a more interesting story than the DJIA at a new closing high.

When Business News Turns Into an Infomercial, by Rev Shark

Originally published on RealMoney on Sept. 27 at 12:25 p.m. EDT

I'm about ready to change the channel from CNBC to Jerry Springer, as I search for greater intellectual insight, useful information and less sensationalism. Seriously though, the focus on the new high in the Dow Jones Industrial Average on CNBC is beyond silly. It simply fans the flames of emotions. It is like a daylong infomercial, lacking the class, and far more dangerous than hair in a can or a ginzu knife.

This is exactly the sort of emotionalism that ultimately led to so much pain for retail investors when the bubble broke in 2000. They were so revved up and convinced by the media that we were going to go straight up because we were at highs that they simply wanted to be in.

Frankly, I'm embarrassed and disgusted as a financial professional to watch this display. Even if the market does continue higher from this point, it is irresponsible to build it up to such a degree. What exactly happens once the DJIA does hit a high? Is there no longer any reason to worry about the market? Should we be buying more and more aggressively as this monumental news builds?

The market continues to act extremely well, but unless you are hypnotized by CNBC, it is a tough chase at this point to put more capital to work. As I said earlier, stick to the charts and don't let the emotions out there unduly influence you. As good as things look today, they can look just as bad next week. Stay disciplined.

Earlier, Rev Shark wrote:

The real story isn't the DJIA at its highs but the bifurcated action of the market and the rotation out of oil and commodities and into technology and retail. Too bad they don't talk about something like that, which would help us make money, rather than sensationalize an out-of-touch index like the DJIA.