The Dow closed at its highest level ever today, and the mainstream press will certainly have a field day celebrating. This is BIG news - the kind you see recycled every half hour on CNN Headline News® until you're both thoroughly sick of it and also thoroughly brainwashed. Big, shallow news.

At 12:33pm EDT today, Marketwatch.com breathlessly reported:

NEW YORK (MarketWatch) -- It took nearly 7 years, but the Dow Industrials has erased the memory of the post-millennium bear market by reaching a fresh all-time high on Tuesday…

But look beyond the headlines, and you see a different story. While the Dow hit a new high today, not a single of its component stocks did. Interesting, isn't it? The index is at a new all time high, but 70% of its components are down 20% or more!

The Dow Jones Industrial Average is composed of 30 stocks. Of these, fully one third of them - 10 stocks - posted their all time highs last century: Coca Cola (KO) and Dupont (DD) in 1998; and McDonalds (MCD), Walmart (WMT), Honeywell (HON), IBM (IBM), Pfizer (PFE), Verizon (VZ), AT&T (T), and Microsoft (MSFT) back in 1999 - seven years ago. Ten stocks made their all-time highs in 2000: Citicorp ( C), JP Morgan (JPM), Walt Disney (DIS), American International Group (AIG), General Electric (GE), Hewlitt Packard (HPQ), Home Depot (HD), Merck (MRK), General Motors (GM), and Intel (INTC).

Only 7 stocks made their new high in 2006, and of these only 3 of them are within 5% of their new high today. 21 of the 30 Dow stocks - that is 70%, folks! - are down 20% or more!

See for yourself in this chart:

(A note on methodology: While it is easy to find a stock's 52 week high, finding its all time high is a little more difficult. The way I did it was to pull up a ten-year chart of each of the Dow stocks on Big Charts and eyeball it. That is why you see a lot of round numbers for those old all time highs. While not exact, it is close enough for the purposes of this exercise.)

As I pointed out in my earlier article, Manipulation, if the Dow were to make a new high, it would be a phony new high, since adjusted for inflation, we are nowhere near the old highs. Using the Fed's very own CPI Inflation calculator (Thanks to George Ure at Urban Survival for keeping a handy link to this calculator right on his homepage) we find that we'd need a 13,817 Dow today to equal the 11,750 Dow of 2000. Put another way, today's Dow High of 11,754 is equal to only a Dow of 9,995 in 2000. Pfffttt - we didn't even make Dow 10K!

If you calculate the Dow using real money - gold - you find an even worse picture. Measured in Gold, today's Dow is equivalent to only about 5,100! Using an average gold price of $275 in 2000, we establish our year 2000 benchmark: 10,750/275= 39. Using today's gold price of $580, we have 10750/580=18.5 From 39 to 18.5 is a 52.5% drop, which is equivalent to only Dow 5K!

So is it really a new high? No. But please let me know if you hear any of this mentioned on the evening news tonight.

At the end of the day, the Dow was off its best levels, but still managed a new closing high of 11,727.34. There will be an ensuing media circus that will distract from any real issues or difficult topics going into the November elections, which I believe is the point. I know many out there will disagree with my analysis. In Manipulation, I put forth the idea that the Dow is being held up for political reasons prior to the election. I know that over the long term, markets cannot be successfully manipulated. However, for a few weeks, to make the economy look stronger than it is and to help the powers that be remain in power...

Whether you believe in this thesis or not, the stakes for Bush and the Republicans are very high in this coming election. The future of the country hangs in the balance, and the Republican party knows it. Should the Democrats win control of one or both houses of Congress and serious questioning about the Iraq War begins, there will be hell to pay. This is why Bush has given himself retroactive immunity for any war crimes he's committed with regards to the torture and mistreatment of US terror detainees.

And this is why I believe we will continue to see phony record Dow highs on the marchs toward election day - it is a major, empty distraction that should none-the-less makes people feel good. Unless they see through it. (What are we being distracted from? How about that Henry Kissenger is a secret advisor to the White House and wants to fight Vietnam all over again in the form or Iraq?) If they don't it will make voters less likely to rock the boat - or should I say, rock the vote - on election day.

I hope that I am wrong, but the stakes are so high that I would honestly be surprised if they weren't trying to keep the market up until election day.

In a previous article, I said that if the market makes new highs, I would go long the market. I have since changed my mind. The fundamentals do not support the optimism, and I believe it is dangerous to buy stocks at these levels.

After making a tentative new high on the Dow, the market’s second day follow through action (10/4) was strong. What can I say? I’m a bear, but I have to call it like I see it. This slow, steady, methodical advance reminds me of Nasdaq 1999, when the market doubled in a span of less than a year. Phony or not, this market has the potential to move a lot higher, very quickly and today it declared its intention. So much of today’s program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize.

As I’ve mentioned many times, never argue with new highs! Phony or not, what we have are new highs. If you’re a bear, get out of the way! Take a look back at Nasdaq 1999. The market bounced around between 2,500 – 3,000 for most of the summer, and when it finally broke through 3,000 — to new highs — in early November 2000, it barely corrected before hitting 4,000. Boom. 33% in two months. That was the work of the momentum buyers, creating new highs, buying the new highs, preempting the dips before they appeared. The march upwards was steady, strong and breathtaking. Bears were shown no mercy. Timid bulls were given no pullbacks to establish positions. It was day after day of steady, momentum driven advances.



If you recall late 1999, there were just as many skeptics as there were bulls: Only 3 years earlier the market had been trading at 1,000 – it had already come a long way without a correction. Nasdaq stocks had PEs over 100, over 200, over 500, if they had any earnings at all! Stocks would move 5, 10, 20% in a day! It was an unsustainable, unbelievable bubble, and bears knew it couldn’t last forever. Many bears tried to hold out, but they added their own fuel to the fire by throwing in the towel, little by little. Who could blame them? What bear could withstand a 100% gain in under a year?

Dow October 2006

Which brings us to the present. I’m a big skeptic of these new highs and I know there are lots of skeptics out there. People liked my article The Dow’s Phony New High. I got more email than ever today, and my message board is full of bears – and a few bulls. The fundamental problem the bears are having now is that we look at the big picture – the very big picture - and cannot believe how the market cannot see what we see.

I sympathize completely. However, the bulls look at a much smaller slice of the pie: Interest rates are coming down, oil prices are coming down, the trend in stocks is up. Easy 1-2-3: buy stocks! It is a no-brainer. New highs? Buy more! This has been an effective strategy for the past quarter century, and this strategy looks like it’ll continue to work for at least a little while longer.

The Dow has made a new high two days in a row, which is a reality that we bears have to deal with. This is dangerous territory for bears. Once the bulls score a new high, there is no telling how high they can take it, as I have said many times and as Nasdaq 1999 reminds us. I was surprised to find that both today’s Wall Street Journal and Investors Business Daily treated the new high with a healthy dose of skepticism, not hyping it too much. The Money & Investing section of the Journal did have a goofy picture of a cartoon bull, lording over a knocked out bear, and red roses covering the page. But it was not all rah-rah. Under the fold, there was even a story, Despite Blue-Chip Gains, Hedge Funds Increasingly Are Faltering and Closing.

After today’s gains on very strong volume and breadth however, I imagine that their tune will be more bullish tomorrow, and will turn into a breathless orgy before it is all over.

Today’s Boston Metro, the free little daily newspaper digest that everyone reads on the subway here, was a little more optimistic. It had a big picture of the NYSE and a bold headline about the new closing high, and went on to say this:

Ha ha ha! Did you hear that? Are you investors out there carefully parsing economic data and earnings reports? No, I think it’s more like: New highs! Yeah! Buy the momentum!

And this is the similarity with 1999. Since its mid-July low, the market has seen very little in the way of corrections. The action has been slow, steady, and methodical. Just like before, dips are bought before they even turn into dips. This market hasn’t seen a 10% correction in over 3 years. Interest rates are coming down. The price of oil is coming down. Stock prices are going up and that is all that is necessary to start the positive feedback loop of higher prices.



As the great trader Jesse Livermore said, “There is only one side of the market – it is not the bull side or the bear side, it is the right side.” When it has run its course this rally will most certainly meet the same fate as Nasdaq 2000, and the greatest shorting opportunity of a lifetime will be upon us. But bears, keep your powder dry!