Stock Market’s Next Move Is Difficult To Predict Several Complex Factors Will Determine Whether The Dow Stays Above 4,000 Or Retreats

The Dow Jones Industrial Average spent 16 years trying to get through the 1,000 level before finally breaking out in 1982-83.

It zipped through 2,000 only a few years later, meandered for months before topping 3,000 in 1990 and Thursday, after a few minutes hesitation early in the morning, zoomed over 4,000 before falling back to close just above the mark at 4,003.33

Where does it go from here?

Technicians say many factors, including index option put/call ratios, relative strength indicators and price/dividend ratios, suggest the Dow is due for a pullback.

But whether the Dow will retreat merely because it has finally passed 4,000 is difficult to predict.

“Some of (the thousand-point levels) became big resistance,” said John McGinley, editor of Technical Trends in Wilton, Conn. “Two thousand the market went through like a knife through cheese, but 1,000 took 16 years. It often depends on how far the market has come when it gets there.

“If it hasn’t come very far and has it in its mind to go a distance, then it won’t matter. But if it’s been going for a while and people think the bull market is kind of long of tooth, then 4,000 will stop it.”

The Dow touched the 1,000 level several times between 1966 and the early ‘80s before finally breaking through it decisively.

But the 2,000 level, breached in early 1987, was soon left in the dust as the market continued to surge on a host of strong fundamental factors throughout the first eight months of that year.

The 3,000 level was a bit trickier. Worries about the impending Persian Gulf war, among other things, prevented the Dow from topping 3,000 until early 1990.

“For this market, what is pertinent is that this is part of the same rally that started in December, which means it’s pushing three months now,” said Greg Nie, a technical analyst at Kemper Securities in Chicago. “We’re starting to see some signs that a reaction - a pullback, pause, whatever you want to call it - is close by.”

For instance, the ratio of index option call-to-put buying, normally a contrary indicator, is moving toward the call side, indicating investors are becoming increasingly bullish. That often signals a market that is becoming complacent.

The market is also moving into overbought territory on relative strength indicators.

Moreover, cash reserves are declining, Nie noted.

These indicators are “coincidental to what we saw before the market peak a year ago. The technical picture is slowly but surely moving toward the end of this current phase toward a phase of profittaking. Given what we have accomplished, a setback of 150 points would be normal.”

The wild card is how much further the market can be propelled by shortcovering - the necessity that people who borrowed stock and sold, or shorted, it will have to buy it back, Nie said.

“If we get into a serious run of shortcovering, then I am underestimating the upper boundary,” he said. “That would keep it going. But I don’t know if we’re going to hit that emotional trigger.”

McGinley also called the market tired and ready for a pullback.

“This is the second most expensive market in this century based on the price/dividend ratio,” McGinley said.

The market historically has tumbled when the ratio of stock prices compared with dividends rises into the upper 30s.

“Unfortunately, that ratio has been very high going on two years now,” McGinley noted. “It’s an albatross around the market’s neck, and it’s also saying the risk/reward ratio is frightful. Logically, there is not an investor who doesn’t know we’ve got to be closer to the end than the beginning.”

Some technical market watchers have been looking to 4,050 as a stopping point for the Dow.

The 4,250 level also could prove tough resistance if one looks to price/ dividend ratios, McGinley said.

The highest price/dividend ratio the Dow has ever experienced was 39.7 in 1987, a level that in today’s market would translate to a Dow level of 4,248. At that point, the Dow would be as overvalued in terms of the cost of dividends as it was in August 1987, shortly before the market crashed.

Before hitting 39.7, the Dow’s price/dividend ratio had never been higher than “36 and change,” McGinley noted.

“To argue that the market is going to go substantially higher is to argue that it is going to blow that level out of the water,” he said.