Is 10,500 STILL a No Go?

Last week I wrote about how the Dow Jones couldn’t stick at 10,500.

Well, nothing has changed this week.

This is what I think is going on…

This is a 3-year weekly chart of the Dow Jones. And it shows that since October of 2007, the Dow Jones has been in a pretty nasty bear market.

More importantly,  the Dow Jones is now at that bear market trend line. Will it break above it? That’s hard to say. But there are some other interesting things going on.

For example, the US Dollar Index is trending higher. I mentioned last week how the buck had broken above its 50-day moving average. Interestingly enough, even though the dollar is trending higher, the stock market has maintained its highs.

Sure, it’s not making new highs. But I expected to see more of a correction by now. Maybe a plunge under 10,000?

Of course, a strengthening dollar could actually lead a falling stock market. But why is it taking this long? After all, the dollar/stock relationship had been pretty tight over the last year.

It’s one of those questions I can only guess on. Maybe funds are moving to cash at the end of the year? (My main thought.) Or maybe the dollar carry trade isn’t as big as everyone thinks? Or possibly the dollar hasn’t strengthened enough to cause carry traders to sell?

It’s all just guesses at this point.

Taking a look at the US indexes on a shorter-term time frame, they are all pretty much overbought. I’d put my money on a reversal; with a tight stop set at around 10,550 on the Dow Jones.

This would strictly be a small money bet. None of the major indexes have broken under their 20 or 50-day moving averages. This would be more like insurance.

Fundamentally, there are still some things this recovery hasn’t proven yet. Like, will there be follow through? Consumers are up to their neck in debt. Credit lines are being shut. And a lot of money is spent on servicing debt.

I also think that people are beginning to shun debt. In a credit driven economy, debt is money. So less debt means less money. That’s deflation my friend.

I’m not sure how consumers could keep this economy humming along. If they do, it will be what John Mauldin likes to call a “statistical recovery” and nothing more.

With that in mind I think next year will be a flat year in the market. I mean, do you really expect this year’s momentum to continue? Stimulus is going to fade slowly. Tax credits are going to expire. And the government is going to tighten its budget.

That’s not exactly a good environment for growth.

Now you understand why I feel placing a little bit of insurance on the portfolio would be a good thing to do. Get into a put option, or short something. Just make sure it’s a small percentage of your overall portfolio.

Don’t go off and use 95% of your funds to insure your portfolio. That’s just stupid.

If the market falls, well, your portfolio is buffered somewhat until you can change things up. If the market doesn’t fall, just be glad you didn’t have to use your insurance.

Get it?

Good