Chicken soup for the soul

February 12, 2009

January retail sales were published today: up one percent. It seems the street is completely surprised by that number.

I have been watching the sentiment for the Dow Jones Industrial Average (DJIA) on www.predictwallstreet.com quite closely and it has been interesting. The sentiment for the Dow has been extremely up most of the times since Christmas. Price did not follow this pattern other than an initial push early in January. On the contrary, while initially there was a clear resistance for the Dow to break below the 8000 level, it has crossed it several times now, each times with more ease.

The question then becomes, why are investors so hyped up? Moreover, why is America shopping when the market continues to decline? Why the party when the house is burning?

I am sure there are many answers and we can only speculate. According to the Commerce Department, the causes for the spending gain were higher gasoline prices plus more spending on clothing and food. Chicken soup for the soul.

Unfortunately, no chicken soup has ever had a lasting effect or cured an illness. So unless the doctor prescribes some drugs, maybe even surgery, the illness will continue. And while I am writing this blog, we read that the Obama administration works on a program to subsidize mortgage payments for troubled homeowners. The Dow recovers 250 points.

Of course, for prices not only to stay above 8000, but also to recover, we need more than a promise for a prescription. We need actual drugs that work – and be willing to swallow them even if they taste bitter. While we wait for the cure, we can see the placebo effect of promises by observing the DJIA sentiment trend chart. We can also see that, while still extremely high, sentiment slowly decreases. The placebos are losing their impacts.