Thursday, September 24, 2009

Dow 9917

You heard it here first -- Wednesday afternoon could have been it.

About a month ago, I posted here in response to the number of comments I was hearing about how ridiculous the huge recovery in U.S. stock prices had gotten, as at the time the Dow Industrials had jumped from a low of 6600 and change back in March of this year to around 9100. At the time I posted a largely contrarian view, that the Dow was likely in for another 10-15% rise to right up near 10,000, before I figured it would be destined take a seat after a very likely bounce off of the key 10k level.

Well like I said, Wednesday afternoon, just before 3pm, might just have been the top:

Although the market was weakish in the morning, come afternoon time and word at 2:15pm that the Fed plans to keep interest rates effectively down at zero for the foreseeable future, and the buyers started emerging from the woodwork in typical quick-reaction to a seemingly favorable Fed decision. Within half an hour or so after word from the Fed, stocks were at the highs of the day, and the Dow Industrials crossed the 9900 mark for the first time since the financial meltdown more than a year ago now, briefly touching the 9917 mark for less than a single percent below Dow 10k.

But then everything just fell apart. Suddenly it wasn't interest rates remaining near zero that the traders were whispering about. After a short while to reflect on the Fed's decision, one tidbit started to stand out more and more -- the Fed's concurrent announcement that it would ramp up the slowdown of some of its trillion-dollars-plus of purchases of mortgage-backed securities. All of a sudden, low interest rates were a nice thing, but the reality of withdrawal of the historically extraordinary support the Fed has given the U.S. economy over the past year set in, and the last hour or so of trading was all sell sell sell. By the time the smoke had cleared at 4pm on Wall Street, the DJIA had plunged 169 points in an hour from its high of 9917, closing the day at 9748 for the first abrupt late-day sell reversal we've seen in the market in quite some time.

I said it before and I'll say it again -- I think this market's been itching to go to Dow 10,000 for many months, but I don't feel right now like investors' still-scarred psyches can handle a sustained push into five digits on the world's most-watched blue-chip index. I would not be remotely surprised if this is as high as the market gets for some time now, and that over the next little while we could very well be heading lower and not higher for the first time in six months. Although I still think it's quite clear that the economy is nowhere near as bad as the worst pessimists out there had been fearing now a year after the global financial implosion, it's also equally clear that things are nowhere remotely close to getting back where they were a year or two ago either. 3.5 million incremental jobs have been lost in the last year just in the U.S. alone, and entire pockets of businesses, mostly related to securitization, mortgages, and loan repurchasing, have entirely disappeared, perhaps forever. To suggest that the market can or should keep running up from here back to the old highs is, at least to this market-weary investor, not in keeping with reality. And always staying in touch with reality is one of my basic precepts to smart investing.

So I'm out there looking for put options today on some bad companies whose stocks have rallied hugely with the general flow over the past six months. I really love the stocks I've picked up at ridiculous firesale prices over the past year, even at today's fluffed-up prices after a 60% rally in half a year, but there's no reason for me to sit just idly by and watch my portfolio slough off 20% of its value during a correction that I have felt very confident was coming at more or less exactly the point that the market reversed at yesterday afternoon.

To me, today is another one of those days like when I was out here talking about UYG at $1.50 back in March ($6.33 yesterday afternoon):

It's time to put my money where my mouth is.

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Blogger APOSEC72 said...

Or, say, BAC at 17 (was 5) or CAT at 51 (was 22).

Just saying.

11:52 PM  

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