Dow Nears Record, but Is It Just Another Bubble?

While getting to this point seemed unimaginable not long ago, the Dow industrials are nearing an all-time high after a tumultuous recent past and a decidedly uncertain future.

A Dow Jones Industrial Average trading over 14,000 seems like a quaint relic that hearkens back to the days before subprime, before the near-collapse of Wall Street, before the economy depended on Federal Reserve printing presses to stay afloat.

Looking ahead, the market confronts a set of circumstances with cross purposes: It needs the Fed to keep pushing stimulus but eventually must break free from that support if the gains are going to be sustained. (Read More: Bears on the Brink: 'I Can't Fight It Anymore')

"We're screwed long-term," said Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. "But what's funny is this has been the trend for the last 20 years. We have a crisis, build a bubble to get out of it for five years, the market makes a slight new high, and then we crash."

The Dow hit its closing high of 14,164.53 on Oct. 9, 2007 amid a surge in optimism that there was virtually no limit to how high the market could climb.

The question of whether the current market is in a bubble phase - as Springer suggests - is likely one that will be answered only in retrospect. But there is little debate over whether the Fed has played an integral role in pumping it higher.

Those few who are unsure can check the central bank's own literature: A July 11, 2012 study from the New York Fed stated flatly that the market owed most of its post-1994 gains - that's more than 1,000 points ago on the Standard & Poor's 500 - to the 24-hour period before the Fed's Open Markets Committee meetings. (Read More: Market Savior? Stocks Might Be 50% Lower Without Fed)

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It is at those meetings, held eight times a year, where the Fed decides how it will target interest rates. And for the past four years, it also has been the scene for the FOMC to decide how much money it will create to inject into the economy. Some $3 trillion later, the Fed's influence is unmistakable as investors have piled into equities ahead of meetings where the Fed was expected to boost its easing measures or at least hold the line.

"Central bank liquidity has been by far and away the most important driver of asset prices since the Great Financial Crisis," Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said in a report. "Liquidity has been the basis for our 'I'm so bearish, I'm bullish' view of financial markets over this period."

Indeed, investors have relied on the Fed to respond to bearish economic data with three phases of asset purchases, or quantitative easing. So good economic news sometimes is looked on unfavorably by a market that both has come to rely on its central bank backstop and fears that any upturn in the data will deter the Fed from more easing.

Hartnett, though, projects that cycle to end this year as confidence returns to the market.

Professional traders pay more attention to the Standard & Poor's 500 because it is a broader measure of stock market performance. (Read More: S&P Tops 1,500: Where the Market Goes From Here

But the public usually follows the Dow, which is comprised of just 30 stocks but is considered a barometer for how bluechip companies are performing.

The top gainers between the market peak and now have been bread-and-butter companies: Home Depot (up 97%), IBM (73 percent) and McDonald's (63 percent). However, most of the market's rise in general has been due to company share buybacks rather than average investors jumping back in.

The great quandary of the post-2009 rally has been the absence of the retail, or mom-and-pop, investor. Mutual fund flows are the most popular way to track retail involvement because they are more popular than individual stocks.

They have told a dismal story about confidence.

Some $600 billion has come out of equity funds since 2006, while $800 billion has gone into the comparative safety of bond funds. That trend has changed recently, with $35 billion back in stock-based funds in the past two weeks, $19 billion of which is in long-only funds.

"The past seven years have seen a Great Divergence in terms of fund flows," said Hartnett, whose firm is predicting a "Great Rotation" from bonds to stocks this year. "But recent data show the first genuine signs of equity belief in years."

If Hartnett is correct and the trend continues, it could bolster the argument that the Fed merely gave the economy and the markets the nudge they needed, and corporate America has done the rest.

"It's more than just the Fed. Stock market indices are where they are today because they've earned it," said Lawrence Creatura, equity market strategist and portfolio manager at Federated Clover Investment Advisors in Rochester, N.Y. "There hasn't been a lot of multiple expansion. However, there has been a lot of earnings growth since the troubles of the financial crisis."

Indeed, quarterly earnings for the S&P 500 reached a crisis nadir of minus-9 cents a share for the fourth quarter of 2008, when QE began, to an expected profit of $25.18 a share for the fourth quarter of 2012, according to Howard Silverblatt, S&P Capital IQ's senior index analyst.

Creatura looks at the steel industry as one place that will demonstrate fundamental economic growth and push a market higher beyond the Fed's machinations.

"We're in the middle of earnings season. We're learning more every day about the health of individual industries," he said. "It will be important to pick your spots. Not all industries are created equal."

But what of the end of the Fed involvement? Can the market stand on its own?

"In the very short term, investors would very likely perceive it as negative," Creatura said. "It's important to realize it probably wouldn't occur unless the economy was showing signs of strength."

Not necessarily.

The Fed also could be forced to shut down the printing presses if inflation gets out of hand, a condition that usually happens with little notice. If inflation surges and the economy is still weak, the Fed could find itself in an untenable situation.

"You'd want to be out of stocks. That's a bunch of baloney when they say (the end of QE) can happen gradually," Springer said. "As soon as they announce they're not going to keep printing money and pumping money in, that's going to be the end."