Indicator of the Week: Why the Dow at 18K is Different This Time

Did traders take profits the first time the Dow Jones Industrial Average (DJI) hit 18,000?

Senior Quantitative Analyst
Feb 18, 2015 at 7:39 AM
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Less than two months ago I wrote about the Dow Jones Industrial Average (INDEXJDX:DJI) crossing the 18,000 level, which we're revisiting this week, as the index eclipsed this mark for the second time last Friday. In the prior article, I talked about how these even levels can be popular points for traders to assess the markets and their holdings -- like lines in the sand at which investors consider the index cheap or expensive. In a bull market like the one we've been in, even levels can be popular points at which to take profits.

The numbers showed that when the Dow moved higher into one of these even levels, it often underperformed going forward, especially in the short term. This supported the theory that investors were taking profits at that time. If that is the case, I assume there are fewer traders looking to sell winners this time around, since they did that already less than two months ago. This week, I'll take another look to see if the numbers support that theory.

First Time Rising Into an Even Level: I mentioned above that the first time the Dow runs into an even level, we've historically seen some underperformance going forward. The table below shows what I'm talking about. The numbers summarize Dow returns after the even levels are initially taken out. Specifically, I calculated returns since 1999 when the Dow was below an even 1,000-point interval for at least 20 trading days, and then closed above that level. Also, the data only counts the first time crossing above that particular interval in at least a year. Therefore, a particular interval can have multiple signals, but must've occurred at least a year apart for me to consider them in the table below.

As you can see, the Dow returns after initially running into an even level underperform when compared to typical returns since 1999. The short-term returns are especially lackluster, as the Dow has averaged a loss of 0.45% in the two weeks after initially crossing above one of these even levels, and less than half of those returns have been positive.

Dow Returns After Moving Above Even Level

Second Attempt at an Even Level: This last table shows how the Dow has performed after testing one of these levels for a second time within a year. Again, the Dow had to be below the even level for 20 days. There were only eight returns this time (last Friday was the ninth time), so it's not much of a sample size. However, it does show much better returns when compared to the Dow's first time running into these even levels.

The two-week returns were better than typical two-week returns, and the longer-term returns pretty much match the anytime stats. The theory again is that these even levels are profit-taking points for investors the first time they are crossed. That's why we saw such underperformance in the first table above. Subsequent crosses, like the recent cross above 18,000, do not have bearish implications, as the profit-taking was done when that even level was crossed the first time. That's good news for the market heading forward.

Dow Returns After Second Attempt at an Even Level
 

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