As Fear Returns to the Market, Can Dow 10,000 Hold?

If Dow 10,000 really is a key psychological level, then traders best call their shrinks. The major averages, already on a four-week losing streak, face anxiety over the Euroland debt debacles and the depressing reality of waning earnings momentum. In other words, brace yourself emotionally for Dow nine-thousand-and-change.The blue-chip Dow Jones Industrial Average ($INDU) comes into the week having shed 4% in 2010. The broader S&P 500 ($INX) is off more than 4% and the tech-heavy Nasdaq Composite ($COMPX) is down nearly 6% so far this year. True, such losses are just part of a healthy process of consolidation following the truly epic rally equities staged in 2009. Hey, if the price of Steak-umms jumped 70% in ten months, people would buy fewer of those, too.

But stocks face challenges far less palatable than meat-like edibles this week. It's a cliche, but it's true: Markets hate uncertainty, and wobbly finances in the so-called PIIGS of Europe -- Portugal, Ireland, Italy, Greece and Spain -- have given the euro a touch of the swine flu. That's lifting the dollar -- and putting the whammy on equities.

Dollar Up, Stocks Down

Just take a look at the U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, including, naturally, the euro. It's up nearly 5% since mid-January -- a huge move in currency terms -- and stocks are paying the price. Since the dollar found a bottom on Jan. 14, the Dow's off more than 7% and the S&P 500 is down more than 8%.

Yes, part of the dollar's rally is likely fueled by short-covering speculators who borrowed cheap greenbacks to buy higher yielding assets like stocks, gold and oil (the carry trade), but other signs that investors have become reacquainted with risk abound. Consider the VIX, or CBOE Volatility Index ($VIX). Known as the "investor fear gauge," the VIX jumped more than 20% from last Monday's to last Friday's close. Or take the case that emerging market equity funds -- so rewarding and yet so risky -- saw $1.6 billion fly out the door in redemptions in a week, the largest outflow in nearly six months.

Better yet, just drill down to the sector level of the S&P. Everything is off year to date, but the best places to be have been the defensive sectors of health care and consumers staples, according to Capital IQ. Meanwhile, offensive early-cycle sectors like tech and basic materials are lagging after months and months of hot performance.

Yearnings, Not Earnings

In less fearful times some salutary corporate earnings news might be counted on to give stocks a lift, but, alas, as good as fourth-quarter reports have been, the market has seen better.

Of the 314 companies in the S&P 500 reporting results so far, 74% have beaten Wall Street's estimates, according to Thomson Reuters. (Revenue and guidance have been good, too.) To put that "beat rate" in perspective, on average 61% of companies exceed expectations. Indeed, if the current beat rate holds up, it will be the second best showing since Thomson first started tracking the data in 1994.

So what's not to like? Well, the all-time record beat rate of 79% was notched...drum roll, please...last quarter. In other words, sequentially, earnings momentum -- that great driver of share prices -- may be waning. For a market desperately yearning for catalysts, the timing is hardly ideal.
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