Why the Dow Is Heading Higher

The market is up considerably today in eager anticipation of multiple key decisions from policymakers both here and abroad. At roughly halfway through the trading day, the Dow Jones Industrial Average (INDEX: ^DJI  ) has climbed by nearly 90 points, or 0.66%. Here's why.

What's leading the market higher?
Traders have grasped onto two potentially positive developments to the exclusion of all negative news.

In the first case, the German constitutional court confirmed this morning that it will rule tomorrow on the constitutionality of the European Stability Mechanism, an organization established to provide financial assistance to struggling eurozone members like Spain and Italy. The significance of this ruling cannot be overstated. According to a policy expert quoted by the Financial Times, "If they kill the ESM, the next day the euro is gone." Needless to say, given the direction of the markets, it seems clear that investors aren't anticipating that outcome.

In the second case, the market remains optimistic that the U.S. Federal Reserve will unleash another round of quantitative easing. Following an economic symposium in Jackson Hole, Wyo., at the end of August, Fed Chairman Ben Bernanke clearly left the door open for the bank to do so, saying that "the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." The central bank's monetary policy committee meets over the next two days and could provide a definitive answer to this question by Thursday.

It should nevertheless be noted that the market has been atypically resilient in the face of bad news. Earlier today, for example, the credit ratings agency Moody's warned that it will strip the U.S. of its prized triple-"A" credit rating if Congress fails to reach a deficit-reduction deal before the nation plunges over the so-called "fiscal cliff" -- a series of tax increases and spending reductions set to take effect in January. The move would mirror that of Standard & Poor's decision last year to downgrade the government's previously impeccable rating following Congress' partisan and sophomoric debate over the debt ceiling.

How are individual stocks faring?
Unlike the end of last week, when virtually the entire index moved up in unison, Dow stocks are thus far mixed in intraday trading.

Leading the way up are Bank of America (NYSE: BAC  ) and aluminum producer Alcoa (NYSE: AA  ) . While investors shouldn't read too much into B of A's performance, as it's one of the most volatile stocks in the market, Alcoa's rise seems to be driven by the possibility of monetary easing. Because its top and bottom lines are both affected by commodity prices, any inflationary monetary expansion would be a benefit to the aluminum producer.

Leading the way down, on the other hand, are Kraft Foods (Nasdaq: KFT  ) and Home Depot (NYSE: HD  ) . Kraft, down more than 1%, continues to be afflicted by investors' disappointment with its recent growth forecasts. And Home Depot appears to be giving back a portion of recent gains tied to the nascent recovery in the housing market.

How to combat a volatile market
While the market is up today, chances are it'll be down tomorrow, causing many investors to lose sleep over fear for their portfolios. The best way to escape this emotional rollercoaster is to invest in strong, well-diversified companies that pay a respectable dividend. A small selection of stocks that fit this description are outlined in our free report about three Dow companies every dividend investor needs. Simply click here to download your free copy of this report before it's too late.

Fool contributor John Maxfield and The Motley Fool both own shares of Bank of America. Motley Fool newsletter services have recommended buying shares of The Home Depot. 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.


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