The Dow Jones Industrial Average (ETF: DIA) began in the 1880s with an initial value of 62. It reached the 20,000 level for the first time this week.
What does a big round number mean for a well-known stock market index such as the Dow Jones Industrial Average, known as the DJIA, if anything?
Well first, it is a psychologically important and note-worthy event, which garners media attention outside of the normal financial media. So, it can make the general public and investors who rarely check their accounts stand up and take a bit of notice.
But the question for active investors is this: Does it generally portend more upside in the markets, a major top, or neither?
To answer this, I’ll start by looking at the recent price action in the Dow, via its Daily chart.
This chart contains the settings and indicators that I utilize for trading sectors in our ETF Sector Alerts premium service. Those are Exponential Moving Averages, which show the average price level over a certain time frame (these are useful to show directional trends and support/resistance levels), and Stochastics, which is an oscillator I use to measure the strength of the price action.
What you can note on the chart above, regardless of whether you use charting techniques, is that the DJIA was in a narrow consolidating range since mid-December and it has recently broken above this range.
This is a clear bullish indication, as buying pressure on the Dow stocks has pushed them above recent levels that capped upside and above the 20,000 level.
If you notice, this pattern is similar to that which occurred before and after the election — where the market was in a narrow range, then clearly broke out to the upside. This was followed by a big, rapid one-month move in the markets.
Are we in line for a duplicate strong rally in the market? Well, since the market rallied over 11% in a month and a half, that isn’t likely — the speed and slope of that post-election market rally is certainly out of the norm for a broad-based U.S. market index.
However, this DJIA Daily chart is clearly bullish at this juncture, by the measures I utilize.
In addition to the bullish breakout above the range that I previously mentioned, we also see the index holding support recently on a pullback right around the faster 24-day Exponential Moving Average. This is also a sign of strength.
And the Stochastics Oscillator at the bottom of the chart has broken into a strongly bullish reading this week, as well.
So, the price action and charts on the DJIA looks bullish and likely for continued upside in my analysis. But what does history tell us about previous major round numbers reached in the markets?
I examined some of the big round levels reached in the major U.S. market indexes over the past 20 years, to see if any trends emerged:
- The DJIA first hit 15,000 in May 2013. It was 3% higher later that month, but went back below 15k by June, moving as much as 3% below the round level. It’s worth noting that the market was nicely higher 1 and 2 years following this landmark.
- The DJIA first hit 10,000 in March 1999. It quickly dipped back below and lost over 3%, but by the end of the next month, it was sharply higher. Moreover, within 2 months it hit 11,000, 10% higher. The market ended that year higher, but reached peaks in 2000 that it would take many years to recover from.
- On the S&P 500 Index (ETF: SPY), that index hit 2,000 in August 2014. It hovered around there for about a month, and then lost nearly 10% by October. It then rallied back sharply into December, but basically ended flat for the 12 months following 2k being broken.
- The SPX hit 1,000 in February 1998. It was sharply higher for the two months following, gaining as much as 11%. However, it broke back below 1k later in that year, losing nearly 8% at the lows. Then 1999 and 2000 were strong years for the broad market.
- For the Nasdaq Composite, the most infamous round level reached was when it broke 5,000 in March 2000. That was during the height of the internet bubble, and it didn’t retake that level until 2015. This is a historic psychological market peak that many point to when looking at round market levels.
- For the curious, the Nasdaq 100 Index (ETF: QQQ) also nearly reached 5k in the year 2000, but it didn’t quite get there. Nonetheless, the highs reached in that index that year weren’t reached again until 2016. And it just broke 5,000 this month for the first time ever.
- Another noteworthy historic bubble peak was in Japan’s Nikkei 225 Index. Although not a round number, the Nikkei hit nearly 39,000 in 1989. In the 27 years following, it has barely retaken half of this level, currently is a bit under 20k.
So what does looking at the price action for the Dow Jones Industrial Average following these previous key round levels and peaks tell us?
It tells us this: There is no set pattern here.
But it is noteworthy that in every instance, the index eventually broke back below the key round level (often quickly), even if only for a short time period, before in several cases resuming its upward climb.