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Dow 13,000 May Finally Lure Investors Back Into Stocks

Tuesday, 21 Feb 2012 | 11:25 AM ET

Crashing through psychological milestones usually makes for a good headline but rarely means anything to the professional traders on Wall Street. Dow 13,000, though, could be different.

champagne glasses
Ian O'Leary | Dorling Kindersley | Getty Images
champagne glasses

When the blue-chip index pushed through 10,000or even 12,000, most traders yawned and went about their business. The market moved higher, but there was little sentiment that getting through big, round numbers had anything to do with it.

Now, though, with 13,000 reached for the first time since May 2008, some are wondering whether the news finally might push retail investors off the sidelines.

Traders normally "don't put too much faith into" such events, but might reconsider now, says Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati.

"In this particular case, we still know a lot of retail investors missed a good majority of the rally," he says. "A big benchmark such as 13,000 could be a nice sign to maybe some investors that they may want to start putting some of their money into the market."

The Dow last closed above 13K on May 19, 2008.

A few facts about market performance since:

  • The Dow closed above 13,000 a total of 19 times while heading north towards the all-time high of 14,164.53.
  • The biggest gainers since the first 13K close have been McDonald's (64.2 percent) , Home Depot (59.1 percent) and IBM (52.6 percent) .
  • The biggest losers have been Bank of America (-77.6 percent) , Alcoa (-76.9 percent) and General Electric (-41.3 percent) .
  • The Dow last closed above 14,000 on Oct. 17, 2007 and is still down 7.6 percent since.

A few other things have happened since then that you may have read about: The near-collapse of the financial system, the 2010 Flash Crashin which the Dow lost nearly a thousand points in a few minutes — not to mention the historic downgrading of U.S. debt and a sovereign debtcrisisimploding in Europe.

And to be sure, the market faces numerous headwinds both fundamental and technical.

The U.S. economic recovery remains tenuous, particularly because of rising energy prices, and the European debt crisis is not going away.

On the technical side, Dow transportation stocks have hit a level that has preceded a sharp selloff the previous two times they have been in this range. Transport weakness is considered a key Dow Theory sign that the index is poised to go lower.

Still, the market has persevered and is getting close to erasing all the losses incurred during the crisis that took down so many of Wall Street's biggest names.

But it has done so largely without retail investors, who have piled their money into bond funds and largely have avoided stocks, despite the market breaching the big headline numbers.

"I could be wrong, but from what I gather there is no retail in this market," says Rick Bensignor, chief market strategist at Merlin Securities in New York. "This (2012 rally) is mostly hedge funds that came out of the gate underperforming who are incrementally being forced to buy stocks and beat benchmarks. Getting through last year's highs may be another piece of the puzzle that drags people in."

Dow 13,000 Next Stop?
The Fast Money crew discusses the Dow's nearing the 13,000 mark and what it means for investor sentiment, with Reggie Middleton, Boombustblog.com.

One reason that the Dow thousand-point barriers generally don't move the market is that Wall Street traders really don't pay much attention to the index. The public uses the Dow as a guideline both to market and economic health, but traders focus far more on the Standard & Poor's 500 , which has a much broader reach than the Dow and its 30 components.

The S&P broke through the 1350 barrierThursday and held it in lackluster trading Friday. Bensignor says the index's next target is last year's closing high of 1363.

Retail investors, in the meantime, are slowly shuffling back into the game.

Zero-yielding money market funds — often referred to as "money on the sidelines" — lost another $5 billion in retail money last week to hit their lowest level since July 20, 2011, according to the Investment Company Institute. Equity funds caught $3.62 billion of that money — an incremental gain, but a gain nonetheless.

With the headlines that Dow 13K will generate, it might be enough to pull in some more money.

"We are at a truly important level, and we should know based not only on what we do today but also the first part of next week whether the bulls will be able to muster strength to push higher," Bensignor says. "If we do, we could run another 3 to 5 percent higher before we start hitting resistance again."

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