Dow 13,000 – The Psyche of Round Numbers Market Indicator for the Week Ahead
The Dow Jones Industrial Average traded above the 13,000 mark for the last time when Lehman Brothers was still a going concern and the financial crisis was not quite yet in full-swing.
DJIA 13,000 May Finally Lure Investors Back Into Stocks
February 27, 2012
Tuesday, last week, saw the Dow Jones Industrial Average (DJIA) touch the 13,000 level for the first time since the 2008 market crash.
Crashing through psychological milestones usually makes for a good headline but rarely means anything to the professional traders on Wall Street. The DJIA 13,000, though, could be different.
When the blue-chip index pushed through 10,000 or even 12,000, most traders yawned and went about their business. The market moved higher, but there was little sentiment that getting through big, round numbers had anything to do with it.
Now, though, with 13,000 reached for the first time since May 2008, some are wondering whether the news finally might push retail investors off the sidelines.
One reason that the DJIA thousand-point barriers generally don't move the market is that Wall Street traders really don't pay much attention to the index. The public uses the Dow as a guideline both to market and economic health, but traders focus far more on the Standard & Poor's 500 (SPX), which has a much broader reach than the Dow and its 30 components.
The S&P broke through the 1350 barrier Thursday and held it in lackluster trading Friday. Bensignor says the index's next target is last year's closing high of 1363.
Retail investors, in the meantime, are slowly shuffling back into the game.
Traders normally "don't put too much faith into" such events, but might reconsider now -- in this particular case, we still know a lot of retail investors missed a good majority of the rally -- a big benchmark such as 13,000 could be a nice sign to maybe some investors that they may want to start putting some of their money into the market.
Zero-yielding money market funds — often referred to as "money on the sidelines" — lost another $5 billion in retail money last week to hit their lowest level since July 20, 2011, according to the Investment Company Institute. Equity funds caught $3.62 billion of that money — an incremental gain, but a gain nonetheless.
With the headlines that Dow 13K will generate, it might be enough to pull in some more money.
Humans tend to think in round numbers, so these even levels are very important. You will often see stocks struggle when reaching a round number, as investors and traders mark that level specifically as "expensive" or "cheap."
For example, you would not be likely to hear a trader say, "12,766 seems overextended for the Dow, and that's when it's time to limit exposure." No, he'll say, "13,000 looks expensive." However, these psychological levels do not always act as barriers. For example, they can also be magnets. Once the DJIA gets past the 13,000 level, the next number investors could be eyeing is 14,000, and the market will move quickly and effortlessly up to that level!
Below is the Dow since 2006, with the 13,000 level marked. You can see it first overtook this level in 2007, when it chopped around for a while between 13,000 and 14,000. When it fell back below 13,000 in 2008, it retested this level one more time, but was knocked down -- and, of course, the crash ensued. In more recent times, the Dow flirted with 13,000 in the middle of 2011, but never touched it (it came within about 1% of 13,000). So, here we are again at this important round number. Hopefully, the analysis below can help us determine what to expect.
Quantifying the Data
It is interesting throughout the market history to see if these psychological levels have, indeed, been impediments to the market. Specifically, by looking at how the DJIA fared after touching an even increment of 1,000 -- if the Dow struggled at that area, it might go back and forth across the level. In that case, the first signal is only taken into consideration for this theory. The Dow first crossed the 1,000 barrier in 1966. Since then, there were 39 times when it went running into one of these psychological barriers.
The results are in the table below. The second table shows typical data for the DJIA since 1960, for comparison. It does appear that, in the short run, the market does underperform after running across these even levels. In the two weeks after touching a millennium marker, the DJIA averages a loss of 0.42%, and is positive less than half the time. Typically, the market gains an average of 0.28%, and is positive 57% of the time. In the longer run, though, these levels have had little effect.
A few facts about market performance since the Dow last closed above 13,000 on May 19, 2008:-
• The DJIA closed above 13,000 a total of 19 times while heading north towards the all-time high of 14,164.53.
• The biggest gainers since the first 13K close have been McDonald's (MCD) - +64.2 percent, Home Depot (HD) - +59.1 percent, and IBM (IBM) - +52.6 percent.
• The biggest losers have been Bank of America (BAC) --77.6 percent, Alcoa (AA) - -76.9 percent and General Electric (GE) --41.3 percent.
• The DJIA last closed above 14,000 on Oct. 17, 2007 and is still down 7.6 percent since.
A few other things have happened since then that you may have read about: The near-collapse of the financial system, the 2010 Flash Crash in which the DJIA lost nearly a thousand points in a few minutes — not to mention the historic downgrading of U.S. debt and a sovereign debt crisis imploding in Europe.
And to be sure, the market faces numerous headwinds both fundamentally and technically.
The U.S. economic recovery remains tenuous, particularly because of rising energy prices, and the European debt crisis is not going away.
Investors are at a truly important level, and they should know based on what the first part of the week ahead presents, as to whether the bulls will be able to muster strength to push higher -- if they do, there could be a run another 3 to 5 percent higher before starting to hit resistance again.
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