Bulls vs. Bears battle for Dow 8,000 to continue into new year


Earlier this month, the Dow made two runs at 9,000 before moving back toward the 8,500 range, which brings Dow 8,000 back in to focus.

For those investors who may not follow indices closely, the 8,000 level has psychological but not technical support, the latter of which measures such things as the number of investors who are buying and selling, whether investors are committing new money to the market, and so on.

The issue: U.S. economy's health

Even so, right now a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls, that the worst news is behind us and that government stimulus, fiscal and monetary, will get the economy moving again.

The Dow Wednesday closed below 8,419. If the bears can keep the Dow below 8,000 then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Further, with most trading desks half-staffed during the last two weeks of the year, nothing definitive regarding the market's direction is likely to occur before the new year. Also, institutions may continue to sit on their hands in early January 2009, preferring to await the Obama Administration's inauguration and the announcement of the fiscal stimulus package's exact size, now believed to be approaching $800 billion over two years.

Even so, let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment analysis regarding where the Dow is headed, near-term.

Technical Indicators: Bearish.
Fundamental Indicators: Bearish.


Monetary Policy: Officials are doing everything they can to stimulate growth. Bullish. The Fed will use quantitative easing to ensure that the credit markets and key institutions remain liquid.

Fiscal Policy: A large fiscal stimulus package, possibly as big as $800 billion over two year, is on the way. Bullish.

Credit Markets: Recovering, but still strained, with still too much interbank distrust and fear. Not enough banks are providing credit to where it's needed: for commercial operations. Small businesses and consumers are having a hard time obtaining credit. Bearish.

Conclusion: The view from here argues that the outlook for U.S. stocks and the U.S. stock market is bearish at least for the next three months, and most likely through Q2 2009. Further, if Dow 7,600 doesn't hold, the market could fall much more, particularly after 2009 earnings estimates are revised downward, as they are expected to be.

Market Analysis: The Dow's path of least resistance, from a technical standpoint, is down. There's technical support in the 7,300-7,600 range but not much after that, which is why the psychological 8,000 level is important: it's not as strong a barrier as technical support, but it's 'the barrier before the barrier' -- and the goal is to avoid testing the last support, if possible.

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Last updated: February 13, 2012: 01:23 PM

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