At Dow 14,000, Don't Fight the Uptrend

Why moves above round-number levels haven't always been cause for celebration

by 2/2/2013 10:25:00 AM
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Indicator of the Week: Dow 14,000 and 1,000-Point Intervals
By Rocky White, Senior Quantitative Analyst

Foreword: Last Friday, the Dow hit 14,000 for the first time since late 2007. We all remember what happened soon after that. If not, the chart below should jog your memory. These even-level intervals can be psychological barriers for an index as they run into them, and can be viewed by the public as "expensive" or "cheap." For example, it's a lot more common to hear someone say, "the Dow will top out at 14,000," rather than, "the Dow will top out at 13,626."

In the same sense, these levels can be magnets. For example, if/when the Dow clears 14,000, then you may see a quick and smooth rise up to 15,000 before sputtering (wouldn't that be nice for the bulls). This week, I'm taking a look to see how the Dow performs once it rises into one of these even levels (and see if they are, in fact, speed bumps).

 Chart of Dow Jones Industrial Average Since 2007

10K, 11K, 12K, 13K and 14K: In case you doubt psychological barriers play a role in market prices, take a look at the table below. What I did was go back to 1999 (when the Dow first crossed 10,000) and looked at how the index did after touching one of these even levels (10K, 11K, 12K, 13K or 14K). I only counted it if the Dow had been below the level for at least a month before crossing above the level.

As it turns out, the Dow really struggles at these levels -- look at the one-year returns. The typical one-year return for the Dow since 1999 is 3.04%. But when it just crosses one of these even levels, it averages a loss of 4.05%, showing a positive return just 36% of the time.

Dow Returns - After Crossing Above 1,000-Point Levels

Finally, here's a table breaking down the one-year returns by the even level that was touched by the index. This will be the third time the Dow has hit 14,000. The first two times were in July and October 2007. Hopefully, the third time's the charm.

Dow Returns - One Year After Crossing Above 1,000-Point Levels

This Week's Key Events: Earnings Season Rolls Through the Tech Sector
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.

Monday

  • The week begins on the economic front with the Census Bureau's latest data on factory orders. Elsewhere, Baidu (BIDU), Clorox (CLX), Gilead Sciences (GILD), and Yum! Brands (YUM) will all take to the earnings stage.

Tuesday

  • The economic calendar is light on Tuesday, aside from the Institute for Supply Management's (ISM) non-manufacturing index for January. Meanwhile, Walt Disney (DIS), Sirius XM Radio (SIRI), BP plc (BP), Chipotle Mexican Grill (CMG), Expedia (EXPE), Kellogg (K), Panera Bread (PNRA), Take-Two Interactive Software (TTWO), Toyota Motor (TM), UBS AG (UBS), and Zynga (ZNGA) will unveil their respective earnings announcements.

Wednesday

  • Wednesday features the latest Mortgage Bankers Association (MBA) mortgage index, as well as the weekly crude inventories report. Green Mountain Coffee Roasters (GMCR), Visa (V), Akamai Technologies (AKAM), CVS Caremark (CVS), DeVry (DV), GlaxoSmithKline (GSK), Time Warner (TWX), and Yelp (YELP) will each take turns in the earnings confessional.

Thursday

  • On Thursday, we'll get the usual update on weekly jobless claims, preliminary productivity and labor costs for the fourth quarter, as well as the latest consumer credit data. Earnings results are due out from Sprint Nextel (S), LinkedIn (LNKD), Coinstar (CSTR), CIGNA (CI), ON Semiconductor (ONNN), OpenTable (OPEN), Philip Morris International (PM), Sony (SNE), and Teva Pharmaceutical (TEVA).

Friday

  • We'll round out the week with the latest trade balance figures, as well as wholesale inventories for December. Meanwhile, Wall Street will digest earnings results from AOL (AOL), CBOE Holdings (CBOE), and Moody's (MCO).

And now a sector of note...

Internet
Bullish

A number of prominent web-based companies have caught our bullish attention in recent weeks, due to the winning contrarian combination of strong price action amid continued skepticism. Plus, as earnings season progresses, a number of Internet heavyweights -- including eBay (EBAY), Google (GOOG), and Netflix (NFLX) -- have rallied after exceeding analysts' expectations. Coming up this week, we will hear from Expedia (EXPE) and LinkedIn (LNKD). Nevertheless, technical standouts like NFLX, EXPE, and LNKD stand to potentially benefit from short-covering activity, as short interest represents, respectively, 21%, 9%, and 6% of these equities' floats. There is also room for more Wall Street experts to shift to the bullish camp. NFLX has 18 "hold" and five "sell" or worse ratings, compared to just six "buys," while LNKD has 14 "hold" ratings versus 15 "buy" or better votes. The story is similar for EXPE, with 10 "holds" versus eight "buy" or better recommendations. During the near term, analyst upgrades or price-target hikes could spur additional buying demand for these outperformers. The First Trust Dow Jones Internet Index (FDN - 42.79) tracks a basket of roughly 40 Internet names -- including all of the aforementioned companies. The FDN is continuing to consolidate near all-time highs, and the $42 level remains important. This area is 50% above the ETF's October 2007 high and October 2011 low, and the security's lowest point this week was $42.05, which coincided with the ETF's ascending 10-day moving average.

 Daily Chart of FDN since November 2012

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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