Stocks Post Gains, but Dow Fails to Hold 12,000

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The Dow Jones Industrial Average ($INDU) on Wednesday crossed the technically meaningless but psychologically soothing 12,000 level for the first time since June 2008, but closed just shy of that plateau.

The blue-chip average hit a high of 12,020 at one point in the session before finishing at 11,986, up 8 points, or 0.1%. The market traded in positive territory for most of the day, bolstered by fourth-quarter earnings reports, surprisingly strong new-home sales and the Federal Reserve's commitment to its $600 billion bond-buying program.

The broader S&P 500 ($INX) added 5 points, or 0.4%, to close at 1,297. The tech-heavy Nasdaq Composite ($COMPX) gained 20 points, or 0.8%, to finish at 2,740.

Markets Remains Overbought

The Dow stands just 14 points short of a 12,000 close, but after such a hot run in so short a time, enjoy this level while it lasts. Markets don't move in a straight line, and plenty of indicators suggest stocks are due for a pullback -- or even a full-blown 10% correction.

Comprising just 30 stocks, the Dow isn't representative of the broader market. That's why investors use the S&P 500 as the default proxy for U.S. equities. Still, the Dow is the oldest and best-known index -- and probably has more impact on individual investors' perception of the market's health than any other benchmark.

When the Dow crosses these five-digit, even-number levels, folks on Main Street are more inclined to move some of the money they've plowed into bond funds over the last three years back into stocks. Such is the irresistible allure of rising prices.

That's not necessarily a good thing. Before Wednesday's action the Dow last crossed 12,000 on June 19, 2008 -- and that was on the way down. The blue-chip index first broke the 12,000 barrier on the way up on Oct. 19, 2006. And it's criss-crossed the level plenty of times in between. See the chart below.

But don't be surprised if the level doesn't hold. On a technical basis, the market remains overbought and investor sentiment is dangerously bullish. Sentiment is actually a contrarian indicator. When everyone is pessimistic, all the sellers have already sold, the thinking goes, setting stocks up for a rise. The converse is also true. When everyone is roaringly bullish, all the buyers have already bought -- and stocks are primed for a fall.

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That's why even the bullish and profitably prescient Ed Yardeni is cautioning clients that sentiment is oh-so-close to correction territory. The president of Yardeni Research called the intraday bottom of the bear market when the S&P 500 hit 666 on March 6, 2009. It's up more than 90% since then.

Yardeni Still Bullish on Stocks

Yardeni remains bullish on stocks, but as he cautioned clients today, the Investors Intelligence Bull/Bear Ratio rose this week to 2.9.

"In the past, readings around 3.0 suggested that the investing class was too bullish and that the odds of a stock market correction were high," Yardeni writes. "As a result, even bullish investment strategists are hedging their bets by warning that the market is overdue for a correction."

A 10% correction would eventually shave 1,200 points off the Dow, bringing it down to 10,800. If that scenario plays out, the next key psychological level on the Dow might be a reprise of 11,000 rather than 13,000.
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