Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Placebo Effect as the Dow Jones Passes 13,000

Stock-Markets / US Stock Markets May 01, 2007 - 12:32 PM GMT

By: Paul_Petillo

Stock-Markets

Consider Dow 13,000. We have already surpassed that mark and probably will do so repeatedly in the next several weeks. To skeptics such as myself, there is an underlying fallacy in numbers such as this. When DJIA hits new high water marks, it allows investors to fall prey to the big number fallacy.

The big number fallacy goes something like this: All big numbers, and we can certainly qualify 13,000 as a big number in terms of stock market advances, are considered infinite. There is the possibility that given enough time the Dow could lumber on towards infinity. And the chartists among us will agree, based on the pace of recent years that it could happen in our lifetimes.


Most would agree that the meteoric rise in that index of thirty industrials that occurred from 1990 through two small recessions and a market correction or two has been impressive. And as we further consider the big number fallacy we find the Dow 13,000 is larger than any other previous number and yet smaller than any other that may lie ahead and, to complete the infinite fallacy, the numbers are the same as each other. Being greater, less than and the same as is a feat that only numbers can accomplish.

The problem with such thinking is one of promotion. To most investors, big numbers can only get bigger. In December of 2003, I offered readers of this column the following suggestions when another big number was broached. The excerpt was from an article titled the Kiss of Dow 10k.

“ There are still some worrisome indicators ,” I wrote suggesting that 10k might be just a smoke screen of sorts masking deeper problems . “Right now though, it is important to think about how we should act, what we should do, and how disastrous mistakes of the past can lead us to profitable maneuvers in the future.”

You will remember that many of us were still stinging from the losses we experienced when the market seemingly fell from beneath our collective feet and this article sought only to forewarn investors from jumping in. It is a well-documented fact that investors like markets on the rise, disdaining the bargains of a market on the decline.

“Many of the pundits that I hear of late are encouraging trading in a market that is moving steadily higher. Buying into such scenarios takes more discipline than many people have. There are some simple guidelines you can use though that will make any correction in equities (oops! the bear in me is slipping out) less painful.”

To this day I remain skeptical – invested mind you, but not so certain that what we see is reality. My next suggestion sought to temper enthusiasm but not discourage the human element involved.

“Once you have made your decision to buy a certain stock, buy half as much as you would like. Your exuberance has probably taken over your research and trimming your enthusiasm for your decision is better done initially. This market is trading at very high levels and in spite of all of the potential, all of the growth, and all of the positive numbers, we have come a long way too fast.”

And that fact remains true today.

“There are some technical problems with the markets right now. [A] Lack of conviction means that money is simply moving around in as many issues as possible, a spreading of risk that isn't necessarily something that should be confused with diversification.

“Profits at many companies are up based on lowered guidance as reported to analysts. Underestimating profits is garrulous at best, lulling the average investor to sleep while selling their own shares at record levels.”

With companies briskly repurchasing their own shares coupled with the hot pursuit of potential leverage buyout candidates, the result, the current reporting season has been grossly underestimated. And the Dow goes higher.

Some critics have challenged the Dow' performance and questioned the benchmark's viability. The Dow is a price-weighted index giving member companies with rising stock prices higher visibility or weight within the index. As it crosses the 13,000 mark, only half of the Dow stocks were up.

Compared to the Dow, the S&P 500 has 347 advancing issues in an index that is calculated based on market capitalization. And yet, the index has yet to come close to the all-time closing high of 1,527.46 mark set in March 2000.

I was equally critical of the Fed asserting that their failure to raise interest rates was “timid” and “has allowed portfolio managers to run this economy.”

“And lastly,” I wrote, “productivity is not a good indicator that things have improved. As many of the current work force will tell you, excluding the temporary force that is shifting in and out of the only jobs available, capacity to produce is strained to human limits. When manufacturers begin to address this problem and rehire workers to meet growing demand for increased inventories, stock prices will begin to fall.”

In this market, only three years later, manufacturing jobs have shifted to service sector employment and in many instances for considerably less pay. Capital spending, the kind that improves productivity has been almost non-existent leaving many to wonder what is propelling these outsized stock gains.

The gross domestic product is down along with housing. Personal income is up and spending is as well. The economy is down; consumer confidence is on the wane. Regulators are threatening to throw SarbOx out as so much of a knee-jerk reaction while 41% of the profits these companies are reporting are coming from overseas operations. And the market shrugs.

While I suggested that “the kiss of 10k would be mostly a peck on the cheek” . The intervening years have led me to believe that rather than 13,000 being portrayed as the love child of that kiss, it should be identified as more of a placebo for an economy in trouble.

This market offers little in the way of substance and a good deal in the way of illusion. The Latin for placebo is “I shall please” and so the market has. Portfolios and retirement savings plans have benefited from the rise in stock prices. Those prices, acting as placebo, mean very little without underlying growth.

It would be wise to remember that in order for a placebo to work, there needs to be faith in not only the person administering the treatment, the markets, their cheerleaders, and the companies but the patient, the investor as well. Do you have faith?

By Paul Petillo
Managing Editor
http://bluecollardollar.com

Paul Petillo is the Managing Editor of the http://bluecollardollar.com and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via: editor@bluecollardollar.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules