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As Dow Crosses 12000, Pros Urge Caution

The Dow Jones Industrial Average broke 12000 today — a level not seen since early August — and the S&P 500 moved into the black for 2011. But while reaching these mini-milestones could give investors a boost of confidence, some pros warn it may could be short-lived.

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Buoyed by news that the economy expanded in the third quarter and that European leaders have agreed on a rescue plan for Greece, stocks rose 339 points Thursday, following a 162 point rise Wednesday. The Dow is now up 12% for the month and about 5% for the year.

Stocks are still about 500 points below the high reached in late July, before the market turned turbulent.

While investing pros say this rally may draw some jittery investors off the sidelines and back into the stock market, they also point out that next piece of bad economic news could send them right back. “[Reaching 12,000] is just another number,”  says Jeff Sica, president and chief investment officer of SICA Wealth Management, an independent wealth manager based in Morristown, N.J.

Indeed, discouraging economic reports in the U.S. or doubts about the effectiveness of the European debt deal could send markets spiraling again, say analysts. “There is still a very negative sentiment out there,” says Sica.

Given the likelihood of more choppy markets ahead, some advisers are  focusing on new strategies to tamp volatility. Allan Flader, a financial adviser in Phoenix for RBC Wealth Management, is using so-called tactical allocation funds, in which the  managers have the flexibility to move quickly in and out of assets classes. When stocks or bonds begin to look overpriced, these managers can seek a better value elsewhere. Many of these funds also have the freedom to short the market to profit when stocks slump, says Flader.

Other advisers are looking for clues on the market’s next move using a surprising technique: “technical analysis.” Traditionally considered the domain of day traders and hedge fund managers, technical analysis involves looking for mathematical patterns in price movements to predict the direction of the market. “Advisers are using technicals much more now than they used to,” says Jeff Kleintop, the chief market strategist for LPL Financial, who says a growing number of the firm’s 12,000 advisers are using technical analysis.

Of course, the strategy could backfire. Technical analysis is typically associated with short-term trading, in part because day traders rely heavily on it, and also  because using a system that generates buy or sell signals tends to encourage buying or selling more frequently, say analysts. Studies have shown that investors typically pick the wrong time to buy or dump shares, and the recent extreme volatility makes timing decisions more difficult.

For that reason, others experts like Phillip Streible, senior market strategist with MF Global, recommends investors ignore the daily swings and sit tight — at least for now. But for nervous investors who say doing nothing isn’t an option, he advises selling shares during a mini-rally, but then keeping those proceeds in cash until the market settles.

Sarah Morgan contributed to this article.


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    • I am a little reluctant to put money back to work just yet. I think waiting to see what kind of suspicious trading patterns evolve over the next week or two could add significantly to the Guy in the Street’s knowledge. Hype is hype.

      Just my normal paranoia about the relationship between Fat Cats and MY money.

      Be careful out there- There are people attempting to separate you from your money all the time.

    • Apparently the Bernie Madoff scenario represents normal behavior. That should be an interesting addition to DSM-IV. That also provides removal for the insanity defense when the cooks are prosecuted. I’d say its time to turn on the radar and knock a few more down.

    • Stocks surge on Merkel’s words one day then fall the next day alos on Merkel’s words. So here is the schtick: its called insider trading and the Germans have now got an unfair advantage in the Equities and Bond markets. Gee does anyone remember Martha Stewart? Oh yeah, sure, there is no insider trading– everything is secret with the Germans. BULL PIE! INVESTIGATE this now! We are tired of Merkel’s YO-YO stock market manipulation for the benefit of her friends. SHUT UP, MERKEL. Do you get it?

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    • Many of these “pros” were urging people to sell all their stocks because they said Europe was going to collapse.

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