By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Well, the Dow finally did it.
The “it,” of course, is closing above 13,000.
The real story here, however, is not that the Dow finally did so — but why it took so long. After all, it’s been nearly a month since the Dow first came within 1% of 13,000.
The market’s action over the next couple of days will be crucial in helping to answer this question.
If the Dow’s tentativeness in recent weeks was caused by nothing more than the routine difficulties of breaking through a resistance level, then the stock market should exhibit abnormal strength in the next couple of days, now that this resistance level has been broken.
If, in contrast, the market was bogged down by something more serious, then stocks’ behavior in coming sessions could very well be anemic at best — and possibly much worse.
I base these comments on a fascinating 1993 study, “Price Barriers in the Dow Jones Industrial Average,” which was published in the academic Journal of Financial and Quantitative Analysis. The authors were Glen Donaldson of the University of British Columbia in Vancouver and Harold Kim, who at the time was at Princeton.
The two researchers carefully analyzed the past behavior of the Dow Jones Industrial Average DJIA -0.41% as it approached round numbers, such as those ending with two or three zeroes.They theorized that, to the extent such round numbers represent genuine psychological barriers, the Dow’s behavior in the vicinity of those barriers would have been different than its behavior when it was well above or below those levels.
Dow closes above 13,000
Stock indexes rise but give up earlier gains after a morning of choppy trading that follows mixed economic data. Still, the Dow ends up closing above 13,000.
For example, it should have taken longer on average for the Dow to move through a multiple of 100 or 1,000 than through any other level. And by the same token, once a barrier was broken, the pace of the Dow’s change should have become faster than average.
This is exactly what the researchers found.
The researchers next conducted the identical test for the Wilshire 5000 Total Market Index XX:W5000FLT -0.56% , reasoning that few investors have been aware of that index’s level. That certainly seems a reasonable assumption; after all, how many of you are aware of where it closed on Tuesday, the day the Dow finally closed above the 13,000 level?
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