There is no instrument to assess the psychological impact the resurrection of Dow 11,000 has. Some claim it is entirely meaningless number, however, yesterday's action strongly conflicts this viewpoint: once 11,000 was sustained optimism fed off of optimism. If anything, Dow 11,000 offers proof to market participants that the music is still playing, and helps prod more capital to come join the dance.

The recent action in equities suggests that we have now reverted back to the "what the heck are investors thinking" form of analysis: a type of psychiatry that does not focus on the current economic situation whatsoever, rather attempts to determine which direction investor feelings might carry the markets next. In-between his convoluted fits of depression and happiness, James Cramer offered a few short and snappy comments on the matter:

"The panic's so thick in the halls of the mutual funds right now that you could get knocked over by it if you were hanging around the water cooler. You know what they're saying, what they're thinking. "Holy cow, the world's changed. Things are going to get better. I can't wait anymore. I can't wait till rates go to 3.5%, give me something to buy." James Cramer, May 17.

Without doubt many fund managers are excited, but excitement is not limited to institutions, and funds. For instance, yesterday the Dow had inflows of $517 million from trades of less than 10,000 shares, and a mere $137 million in inflows from larger transactions (Birinyi Associates). This differential is highly abnormal, and tells us that individual investors were largely responsible for the move higher. Whether or not the so-called 'smart money' intends to sell during the next volume pit stop remains to be seen.

On Wednesday the Dow gained 342 points with NYSE volume surpassing 1.3 billion shares traded and the Nasdaq short-circuited higher by 80 on over 2 billion. The VIX closed lower (25.15), and the p/c ratio came in at 0.64 (versus 0.86 on Tuesday, and 0.63 on Monday). That such a seemingly powerful equity rally was not confirmed by an optimistic p/c ratio could be cause for concern: the rally was bullish but not 'new paradigm' bullish. For instance, to begin the year 2000 the p/c ratio never closed above 0.60 until April 13, 00 (0.71): an extremely long period. That close of 0.71 was followed up on April 14, 00 with 0.91 – in hindsight this was a healthy batch of capitulation that completely changed the face of the market. Flash-forward to today, and the picture is not the same.

Admittedly, market capitulation is not a pre-requisite for a sustained rally. However, it is much easier to eat a salad if it has dressing on it. With this in mind, did stocks rally sharply yesterday because shorts began to cover, and people got excited? If so, one has to wonder what factoid(s) have the ability to sustain this excitement. As a couple of PR releases suggested yesterday, the rational behind recent stock price movements is elusive.

May 16
U.S. stocks poised to slump on profit worries – Reuters, 9:15 AM
U.S. stocks climb on outlook for better economy, profits – Reuters, 12:31 PM

CPI was released at 8:30 AM, and nothing transpired from 9:15 AM to 12:31 PM. Is the EMH response that higher stock prices facilitate higher stock prices? This is hardly an efficient conclusion.

5 Fed cuts in a row
Considering comparisons to Japan have been beaten to death – how about a simple question: why is it that Fed rate cuts are always bullish, but rate hikes are never bearish? Ah, yes, the growth into perpetuity argument.

Balancing Act
As equity optimism has developed it is important to recognize that the Fed has already achieved at least one of their goals by cutting interest rates: that being a positive response from the investing public. That the stock markets have responded with such vigor may be somewhat surprising. However, the question is whether this rally can hold on until the economic situation follows. To be sure, the Fed hopes that stock market excitement will ultimately lead to business/consumer excitement.

As for the early 1990s, or the last time the Fed cut interest rates 5 times in row, it may be worth noting that the Fed followed this up with 13 more cuts before they were done. Although 13 is just a meaningless numbers, does anyone conclude today that this economy will need 13 more rate cuts following May 15? No. Rather the quick assumption is that the Fed is nearing the end of its easing cycle, and the economy is preparing for a late 2001 turnaround.

The visible problem with the late 2001 turnaround scenario is that few current statistics, except stock prices themselves, are in agreement. Yes, the bulls have hung on to the housing market, but the bears have a choke hold on the labor market. As well, throw into this mix the inflationary threat brought about from Mr. G's press, slumping productivity, and energy prices, and the table becomes tilted towards the bears. Perhaps the piece of cardboard leveling the playing field is rising stock prices.

Forget everything: lets just bet that Greenspan will soon learn how to juggle. Go stocks - And go gold? Gold rallying as the markets jump? That wasn't supposed to happen. The improbable is all around us.