The Dow's 20K Failures Could Spell Trouble

The Dow Jones Industrial Average's (DJIA) failure to conquer the 20,000 is making history

Jan 11, 2017 at 5:06 PM
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Investors have watched the Dow Jones Industrial Average (DJIA) circling the round 20,000 mark for weeks, with the index coming within half a point of the critical mark. And if it feels like the Dow is being especially coy about crossing the millennium threshold, that's because it is. In fact, the dance with the 20,000 level is making history, according to Schaeffer's Senior Quantitative Analyst Rocky White. Below is what it could mean for the Dow going forward.

The table below shows how many "failures" -- defined as the index getting within 1% of the even number without moving above it -- it took the Dow before first crossing millennium levels. By this standard, the Dow  20,000 has already had more failures than any other level, with 21 (counting today).  The Dow's 17,000 and 18,000 had the next-most failures before a first-time cross, with 17 and 14, respectively. It took only eight failures to topple 19,000.

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The longer it takes the Dow to successfully perforate these key round-number levels -- whether for the first time or not -- the worse the index tends to perform. Below, White calculated the Dow's failures at key millennium markers, hitting the "reset" button with each successful cross. The Dow had to be below the level for at least 20 days before the failure tally -- what we'll call a "signal" -- started back up again. (For example, the Dow first moved above 18,000 on Dec. 23, 2014, and didn't conquer it again until Feb. 13, 2015. Between these dates, there were 12 failures in this signal.)

When the Dow has racked up 15 or more failures before toppling a millennium level -- there have been nine of these signals so far -- it's averaged a loss at each marker going out to three months. At that point, the Dow has been down 1.71%, on average, and higher just 44.4% of the time. Looking six months out, the Dow has eked out an average gain of just 0.04%, but was higher two-thirds of the time.

For comparison, when the Dow makes a successful millennium cross after seven or fewer failures -- there have been 13 of these signals -- it's averaged a three-month gain of 1.15%, and was higher 69.2% of the time. Looking six months out, the Dow was up an impressive 2.4%, and higher 61.5% of the time.

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Interestingly, a crossing after eight to 14 failures seems to be the "sweet spot" in the short term, but foreboding in the intermediate-to-long term. After these signals -- 14 of 15 of which are measurable beyond one month -- the Dow has averaged a loss looking three and six months out.

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Finally, for reference, here is a table of all of the Dow signals, sorted by the number of failures before each cross. The 2016 dance to retake the 18,000 level was the longest, with 40 failures in this stretch.

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