Dow Jones Market Index - Too High?

13,318 was the close for the Dow Jones Industrial Average Index yesterday. Just less than two weeks ago (Apr. 25) the Dow hit 13,000 for the first time in its history. Less than six months from that date,the Dow reached the 12,000 milestone for the first time (Oct. 19). Isit just me, or does anyone else share the butterflies in my stomach? I'm getting a little scared about how fast the market has been moving. A rise of more than 2,000 points in just over six months is wonderful news, but it's also too fast. It took the Dow more than two years from mid-2004 to late-2006 to go from 10,000 points to 12,000 - and those two were record years to say the least.

So with the Dow lingering over 13,300, hitting upswings of 24 out of 27 sessions, astreak not seen for 80 years since 1927, and 23 out of 26 sessions onFriday, also not seen since 1944, the Dow seems awfully high now - explained by and mostly fueled with continuous M&A activity - most recently Alcoa Inc. and Alcan Inc., not to mention news about Microsoft Corp. and Yahoo! Inc., and the list goes on. The Dow Jones market indexhas hit 19 record closes since the beginning of 2007 and 41 times since the beginning of October, its latest coming Friday, its fourth out of four trading sessions.

Has economic news been great? Inhindsight, not really to say the truth. On Friday, the Labor Department announced that only 88,000 new jobs were added, the slowestin two years. Economists had been expecting the figure to come closerto 100,000 new jobs. Complimenting the news, the jobless rate also edged up to 4.5% from the prior month's 4.4%. Last Wednesday, Challenger, Gray and Christmas, a research and outplacement firm, noted that job cuts by major U.S. corporations soared by 44% to 70,672 for April. A day before that, The National Association of Realtors reported that pending home sales dropped 4.9% in March, the index was down 10.5% from the March 2006 reading, while economists had been looking for a 0.4% rise.

I think it's safe to say that the Dow has been fueled mainly from M&A activity that has been superficially pumping adrenaline into the market. Once it wears out, or the slightest of disappointing news gets investors jumping on their toes, the Dow in all likelihood won't hold it's position. On Dow Jones' MarketWatch, a senior writer decided to run some statistical tests on the Dow, and constructed "a database that contained all instances since 1896 inwhich the Dow rose in at least 20 of the previous 25 trading sessions."

Over the 111-year timespan, he came to 35 separate instances, and because many of these instances occurred in close proximity to each other and would lead to double counting, he eliminated all dates that occurred within a month of a previous one in my sample. That left him with 35 instances over a 111-year period. On average over the subsequent quarter, the stock market was unable to sustain even these modestly above-average gains for longer than three months.

On Optionetrics.com, one senior strategists even noticed how the Dow JonesTransportation Average Index had been under performing while the DJIA^ had been setting record highs. It notes that "...the decline in the transports was noteworthy because it came during a time when the Dow Jones Industrial Average (^DJI) was setting new record highs. According to one school of thought,thedivergent performance between the industrials and the transportscouldbe an early warning signal about a possible stock marketreversal..." Click here for the full article.

I've included a graph on the performance of the Dow back in 1927. Noticedhow the streak started during the summer of 1927 (within the bluecircle) and was not able to hold on to the uprise after a few weeks,and subsequently fell back into place (within the red circles). Of course, past performances can't predict future, but then again it's agood benchmark when there's nothing else to rely on.

My thought of the day is: with the Dow lingering so high, sensitivity and volatility rises along with it, such that any minor news (or excuse) will result in a plummet. Coming Wednesday, with the Federal Reserve expected to keep rates stable at 5.25%, all ears will be listening closely to its direction. Oh yes, might I add that both Asian and European indices ended lower earlier today. Let's keep our fingers crossed.