EMOTION IS DRIVING DOW ABOVE 10,000
MARTIN SLANEY
HEAD OF DERIVATIVES, GFT
AFTER all the build-up, the Dow finally did it. For the first time in a year, America’s most famous market climbed back above 10,000. This apparently momentous occasion generated much attention and in last week’s column I suspected that the raft of blue chip results would lend enough momentum for this to happen.
But now it has happened, I have to admit to a sense of anti-climax. So what if the Dow is above 10,000? Is it really that significant?
The stark truth is, not much. The index may have recouped about half of its losses over the past year or so, which would be significant to retail investors if it hadn’t been such a traders’ rally – there simply aren’t that many investors who have got involved in it.
In any case, the Dow is frequently criticised for not being exactly the most representative indicator of the health of the US economy. There are just thirty constituent companies, and these are selected and de-selected by a panel, diluting any attempt at comparing historical prices.
The US economy is hardly giving just cause for celebration right now either. Although earnings are on the rise, we are still not seeing that much evidence of bottom-line revenue growth and unemployment is still high. The good times have not returned yet.
The only real import of the 10,000 mark is psychological. Round numbers always represent psychological barriers in markets, and it’s fair to say that this is enough to influence trading decisions. You can bet there’s an abundance of sell stop loss orders already being placed on the Dow cash index CFD market, just below Friday’s close of 9,995, ready to either cut losses or to hang on the coat-tails of a sell-off if the index doesn’t consolidate above that 10,000 mark.
Psychology is a massively important consideration in determining market direction, but more so than fundamentals? The overriding psychological mood at the moment is emotion, rather than rationality, and that can work both ways.