Dow 10K good for psyche, but is that all?

NEW YORK (Reuters) - The Dow Jones industrial average topped 10,000 for the first time in a year on Wednesday, piercing a level major investors see as merely psychological but which may serve as a buying signal to retail stock pickers.

The milestone points to the resiliency of the market's runup since the lows of early March and growing comfort with the economy's path. But investors warned that it could serve as a trap, something that galvanizes interest from regular investors while institutions pare back positions.

The Dow, an gauge of 30 blue-chip U.S. companies, has risen 52 percent from a 12-1/2 year low hit in early March and finished at 10,015.86. It last closed above 10,000 on October 3, 2008.

This the first time the Dow has risen above 10,000 since October 3, 2008, when capital markets were in turmoil. The next five days were all poor ones, as the index lost more than 18 percent of its value in that short time. The rebound is a sign that markets have moved beyond the tumult of late 2008, but the Dow is still down roughly 29.4 percent from its record close of October 2007.

* "The big question is: with the Dow at 10,000 will you see some of the fixed-income flows that have been driving the corporate bond market in the last 12 months be redirected into the stock market, but you need the psychology to encourage that," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston.

"Investors do feel more confident and less fearful today than at any time over the last year."

* Institutional investors generally don't pay a whole lot of attention to when a major index rises or falls through big round numbers, preferring instead to view them as meaningless

from a technical or fundamental perspective.

But smaller players making adjustments to their 401(k)s and day traders often translate a milestone such as 10,000 as a sign that more gains are possibly on the way, a view that sets the market up for a pullback in the event of disappointing surprises.

* "It's a distraction for the retail guy, for the unsophisticated. It's certainly not a distraction for the professional. The professional sees people wearing hats for a narrow index of 30 stocks," said John Kosar, market technician and president at Asbury Research in Chicago.

* If the Dow were to mount a further advance, the 10,000 level will serve as critical near-term support. But for that to happen, the index has to close above 10,000 for several days to give any confirmation.

On the other hand, Kosar said the current trend should continue for some time. "Until there's a tangible breakdown from these levels, the prior trend is likely to continue. That's the uptrend from March. Investors collectively have to decide if we are going to have a pullback here or we go to the next level."

* The 10,000 milestone has seemed a fait accompli for some time. However, faltering volumes and the market's sideways trading in recent weeks all suggest that the feat came with very little conviction behind it.

Another cautionary signpost is that while the Dow hit a fresh 2009 intraday high, the Dow Jones transportation index lagged.

* Market technicians are mindful of the impact of the changes that have occurred in the Dow over the past year after Citigroup, American International Group and General Motors were booted out of the blue-chip index.

The Dow is a price-weighted average, meaning its direction is dependent on the stock prices of each of its components, while the benchmark S&P 500 is weighted by market capitalization, or what a company is worth. The S&P 500 is now up 60 percent from its 12-year of March 9.

(Additional reporting by John Parry, Editing by Kenneth Barry)