Monday, January 31, 2011

After Fed Noise, Dow Notches Two-Year High

Investors got the big electoral and Fed news they had awaited for months, and it was almost exactly what was already baked into stocks.

The one big surprise was the way the day ended – more on that in a moment.

The Republicans won the House but not the Senate and the Fed announced a QE2 of $75 billion a month, pretty much precisely what was predicted. And for most of the afternoon, the market reaction was subdued.

The Dow’s high and low both came during the meaningless swings that typically follow Fed news, and they weren’t particularly extreme. The Dow fell as much as 91.35 points and rose as much as 37.92 before the pendulum stopped swinging. Ho hum.

What was odd was what happened next. After limping into the last few minutes of trading, the Dow suddenly found a jolt of adrenalin and finished the day at a two-year high – barely, but a two-year high nonetheless, 11215.13. That involved a gain of just 26.41 points, but they were points that investors had been unwilling to contribute in the two weeks or so that the Dow has been threatening to hit a new high.

The S&P 500 didn’t join the Dow at a two-year high, but the Nasdaq did. Next milestone to watch for on the Dow: 11421.99, its finish on Sept. 12, 2008, just before Lehman collapsed.

The Dow’s late-day gains were surprising because normally, when the market receives a dose of widely expected news, it sells off as traders take profits. What explains that last little burst of optimism?
Was it some residual hope based on the day’s little-noted but upbeat news about employment, factory orders and growth in the service sector? Was it a sign that the electoral and QE news somehow left people cheery? Or was it just left-over noise — traders covering bets related to the Fed and election. We presumably will get some answers Thursday, when we see whether there is any follow-through.

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