Thursday, January 27, 2011

Dow 12,000? So what!

The financial media has been growing increasingly giddy over the prospect of the Dow Jones Industrial Average (DJIA) eclipsing 12,000. Now you're probably thinking "haven't I heard this already?". Indeed, you have. On Monday, Tuesday, Wednesday and now today, the Dow hit an intraday high of just over 12,000 - a level considered to be a key level of "resistance" for the overall market. The Wall Street Journal's homepage has a headline boldly proclaiming: "Dow Regains 12,000"

Not to be outdone, similar headlines can be found all throughout the financial press, detailing the minute-by-minute moves in the Dow as it approaches, reaches, and surpasses 12,000. In the case of the last 3 days, this type of reporting held little relevance because the Dow didn't close above 12,000. The last time that the Dow closed above 12,000 was during the height of the financial crisis - on June 19, 2008 - when the index closed at 12,063. Thus, given all that's happened in the financial markets the past few years and the way that stocks have rallied since their bottoming out in the beginning of 2009, 12,000 may seem like a significant level for the Dow.

Alas, it's not. The constant reminder that the Dow is "regaining" 12,000 serves more as a testament to the resilience of U.S. markets than anything else. It holds little educational or predictive value. After all, the Dow only includes 30 companies and the true driver of stock prices - expected future earnings - have not changed all that much in the past few days.

From a psychological perspective, Dow 12,000 is a good sign because it means that investors have renewed optimism in stocks and are pushing prices higher. On the other hand, what do investors gain by reading news headlines detailing tick by tick moves in the Dow as it approaches a level that holds little relative importance? Not too much, especially since the fundamentals of Dow 12,000 are pretty much the same as Dow 11,999.

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