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Why the Dow's Lost Touch With Reality Again Today

If they weren't already, U.S. stock markets are officially in denial.

Yesterday the Dow Jones Industrial Average (INDEX: ^DJI  ) rallied over 1% despite negative news coming from both sides of the Atlantic. We're seeing the same effect at work today as well: More bad news, more stock gains. Coming into midday, the Dow's trading up around 0.5%. Similarly, both the Nasdaq and S&P 500 have also posted gains to the tune of 0.7% and 0.6%, respectively. The market's fear gauge, the VIX (INDEX: ^VIX  ) , also climbed today by 2.6%. And while we always love to see our portfolios in the green, unfortunately today's gains are again purely speculative -- cognitive dissonance at its worst.

Reading the tea leaves
Today's economic news contrasts against the market's bullish posture. According to data released by the Federal Reserve, U.S. industrial production fell unexpectedly in May by 0.1%. The Fed also revised April's gains downward. April's figures dropped from a gain of 1.1% down to 1%. It's not monumental, but a downward trend certainly paints the U.S. recovery as increasingly weak. Consumer sentiment has also fallen sharply thus far in June. Not exactly screaming buy signals. However, the market's clearly interpreting this growing ream of negative data as increasing the likelihood of a third round of economic stimulus on the part of the Fed.

Looming elections in Greece this weekend are the most important story for investors. European stocks rallied going into the weekend in expectation of favorable outcome. These elections could determine Greece's place in the EU and also hold huge implications for the deepening European sovereign debt crisis.

Patient investors are winning investors
We have relatively little in the way of major corporate news. Shares of mega-insurer AIG (NYSE: AIG  ) posted gains in excess of 1% after the company announced it had decreased its dependence on government funding by over $150 billion. The federal government now owns only roughly $30 billion in the company's common stock.

At present, stocks, especially blue chips, look quite attractive. Investors should start working on a shopping list. This weekend should provide further clarity about the market's direction going forward, and you'll want to be prepared. To find out about three cheap, large-cap dividend powerhouses that could make great candidates for your portfolio, check out the Fool's most recent research report. You can access it for free by clicking here.

Andrew Tonner held no financial position in any of the companies mentioned in this article at the time of its publication. You can follow Andrew and all his Foolish coverage on Twitter at @AndrewTonner.

Motley Fool newsletter services have recommended buying shares of American International Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (9)

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  • Report this Comment On June 15, 2012, at 2:13 PM, catoismymotor wrote:

    Could it be that some of the money leaving the other markets, that are down, is being deposited into ours, that is up?

  • Report this Comment On June 15, 2012, at 5:23 PM, mistacy wrote:

    How does this article make sense? Andrew says that the indexes are in denial for going up like they did this week, then at the end Andrew seems to recommend to go long with the market. If anything, the June rally has no leg. The Greek vote is not the end of the European drama, & the US economy is going to stay crippled for a while. Politicians are only concerned about one thing right now, to place their jockey in the presidential seat. People with real money invested are going to cash out a good portion of their portfolio to weather the US election storm. I cant see a real rally taking place over the Summer, & it is doubtful for Fall either. I see a possibility that the indexes are going to test their May lows within a month.

  • Report this Comment On June 15, 2012, at 8:08 PM, nmartell22 wrote:

    This is insane - back-to-back triple-digit days? I thought this article on explained what moved markets really well. Looking forward to the weekend's Greek election....

  • Report this Comment On June 16, 2012, at 6:59 PM, Milligram46 wrote:

    Go Dow go! Just one more day, that's all I ask. Monday I'll be in largely in a cash position.

    Go Dow go!!!

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S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

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^DJI $18169.27 Down -53.76 -0.30%
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Volatility S&P 500 CAPS Rating: No stars
AIG $60.55 Up +0.23 +0.38%
American Internati… CAPS Rating: ***