The Dow made it as far as 9,918 in the rally after the FOMC statement was released on Wednesday 23 Sep 09 before turning around and selling off for the rest of the week.  Does it matter that this rally off the March lows hasn’t made it all the way to the magic round number of 10,000?

The bears keep pointing out that the market is on too high a p/e ratio for a new bull market to be truly underway and therefore a big correction must be just around the corner.  However see “Is the Bear Market Over?” for the reasons as to why the Dow is unlikely to take out the 6 March 6,470 low.

The bull’s case can be summed up in a beguilingly simple way:  The Fed and the BoE are determined to keep interest rates close to zero and carry on printing money until a sustainable economic recovery is underway.  As it is the stockmarket’s job to discount the future then it doesn’t matter what the shape of the economic recovery is going to be (V, W, U or the more exotic Square Root sign), it is more important that an economic recovery is on its way and therefore the market will keep on rallying in order to discount the coming recovery and will continue to frustrate those people who are looking for a big pullback so that they can buy into the market.

The problem the bears have is that anyone disagreeing with the bullish argument above is essentially saying that the central banks are going to fail in their mission to reflate the economy and help an economic recovery to take hold.  There is a very old saying in the markets which goes “Don’t Fight the Fed”.

The central banks have more money than individual stock market participants and thus far the Fed has promised to print $1.75 trillion (they are slowing down the rate of spending as the economy appears to be entering a gentle recovery but rest assured, they will print more money if the economy stumbles again in 2010).  The BoE is set to print £175 billion and they are not slowing down the printing presses as the Governor would prefer to print £200 billion and then see how the economy is getting along.

Possible events which could derail the current rally include a sharp sell-off in the Government bond markets, the monoline insurers being downgraded, problems emerging in German banks once the 27 Sep elections are safely out of the way, Spanish banks admitting they are in trouble with their loans to property buyers and developers (how are the Spanish workers going to generate enough money to service their mortgages when nearly 20% of them are unemployed?) or the US economy slipping back into recession next year now that the boost to demand created by their “Cash for Clunkers” program has expired and especially if the Bush tax cuts are reversed at the end of 2010.  However for now these potential problems are hiding over the horizon and, with interest rates close to zero, the stockmarkets may continue to frustrate the bears and just carry on squeezing higher, climbing the “Wall of Worry”.  We have already had the “Dash for Trash” and therefore the next part of the rally will have to be led by the big quality blue chips.