Indicator of the Week: Dow 17,000 and Even Levels
By Rocky White, Senior Quantitative Analyst
Foreword: The Dow Jones Industrial Average (DJI) hit 17,000 at the end of last week for the first time ever. These even levels can be very significant for the index. Investors may eyeball these round-number levels as points to evaluate the index and determine whether it looks cheap or expensive. In the case of today's rising market, it might be a popular point at which to take profits. On a more hopeful note, even levels might be an eye-opener to investors on the sidelines that this market has been rising, and maybe they'll jump in so they don't miss Dow 18,000. In that case, we might see a pretty quick move to the next 1,000 level.
The chart below shows the Dow over the past 10 years. The even 1,000-point intervals do look pretty significant at times as both support and resistance. This week, I'm taking a quantitative look at how the Dow has behaved after running into one of these even levels. We'll see if there's any evidence that these price points mean anything for stocks going forward.
First Time at Level: The Dow first crossed 10,000 in 1999. Below, you can see how the market performed after first touching each of the 1,000-point intervals since then. I also summarized the results and have a table of the typical returns since 1999 for comparison. You can see, in the short term, the index struggled a lot immediately after touching these levels. The next week's return averaged a slight loss. Over the next two weeks, the Dow averaged a loss of 0.36% and was positive just 43% of the time. Compare that to the typical two-week return of a 0.21% gain and positive 57% of the time. You can see the underperformance doesn't last very long, though; the one-month returns aren't too far off from typical Dow returns, and there's actually outperformance when you look three months later.
Touching 1,000-Point Intervals: In the analysis above, I looked at only the first time the Dow touched one of these levels. Below, I consider each time the Dow rises into one of these levels, even if it has touched it before but fell back below it. Specifically, this study looks at Dow returns after it crosses above one of these levels after being below the level for at least a month prior. Since 1999, the returns are pretty poor across all time frames. Unlike in the tables above, the longer-term one- and three-month returns underperform after the Dow rises into one of these even levels.
Finally, here is the data since 2009. We've been in a pretty strong uptrend over this time frame. You can see that in the 12 times the Dow has moved higher into one of these levels, the returns are pretty close to the typical returns since that time. In that respect, there hasn't been much effect from these 1,000-point intervals. However, note the standard deviation of returns. In the data since 2009 and in the tables above since 1999, the volatility of returns has been significantly less than average after hitting one of these levels. These even levels may be acting as a magnet for the index -- not necessarily knocking the Dow down, but marking points of consolidation. I would say to expect less volatility going forward -- but is less volatility even possible, compared to the last few months?
This Week's Key Events: Second-Quarter Earnings Season Kicks Off
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
And now a sector of note...
Autos & Parts
Domestic automakers reported an industry-wide sales increase of 1.2% in June, with sales for the first half of 2014 rising 4.3% on a year-over-year basis. As a result, the annualized sales rate for the sector is now at its highest level since July 2006. Against this bullish fundamental backdrop, the First Trust NASDAQ Global Auto Index Fund (CARZ) hit a new all-time high of $41.54 last Friday, continuing a longer-term uptrend for the exchange-traded fund (ETF). Meanwhile, among the 24 stocks we track in the autos & parts group, the average year-over-year return is an impressive 36.9%. Despite the positive price action in the sector, analysts are reluctant to endorse the group. The percentage of brokerage "buy" ratings on sector components currently stands at 51%, down from 54% a year ago. It's worth noting that $43 could be a difficult level for CARZ to overcome, as this price point represents double the ETF's 2011 low. However, with sector members sporting an average short interest ratio of 5 days to cover, a capitulation by the shorts could help CARZ extend its climb during the near term.
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