March 2012 Market Update – Dow at 13,000



In case any of you are still watching the Dow Jones (which I hope you are not – it is as relevant as who won the biggest poker pot in Las Vegas yesterday), I thought I might comment on its’ recent performance.

This is a classic case of bad news is good news in the markets.  Ben Bernanke, Chairman of the Federal Reserve, testified before Congress that he did not expect any pick up in the economy for some time.  Traders interpreted this to mean that he might instigate QE3.

QE as you know from our past seminar is Quantitative Easing, and QE3 would be its third incarnation in the last two years.  This is the Federal Reserve buying up all of the Treasury bonds so that banks and investors have nowhere to invest their money but in higher risk assets such as stocks.  This is Bernanke’s attempt to forestall deflation by running up the price of risky assets.  As I demonstrated, QE1 and QE2 resulted in a significant run up in the stock market which then proceeded to crash as soon as the Fed curtailed the program (summer of 2010 and 2011).

Some folks, however, are learning from experience.  Individual and institutional investors (pension plans etc.) are staying out of this.  So who is driving up the market?  Traders.  What a surprise.  The other hallmark of this rally is that the volume is extremely thin; meaning the number of traders involved is very low.  In other words as the Bard said; “much ado about nothing”.