What's The Deal With Big, Round Numbers?

The media's fascination with round numbers on the major indices - especially the Dow Jones Industrials DIA - is one of the great mysteries of the investing game. When the Dow breaks through an important milestone, there tend to be celebrations (remember Dow 10,000?). But whenever the venerable index fails to surmount a big, round number, there is usually disappointment.

The difference may be as little as twenty-five or thirty Dow points - or less than one quarter of a percent. But for some reason, breaking above what amounts to a line in the sand is good while failing to do so is bad.

Milestones Aren't What They Used To Be

Back in the old days, the big, round numbers meant more for at least a couple of reasons. First, the absolute levels of the indices were much lower. Thus, the Dow moving the 100 points from 4,900 to above 5,000 was a bigger deal than the 100 points needed to overtake 16,000.

In addition, investing in an index used to be tough. Back in the early 1980's mutual funds had barely taken root as an investment tool for the public. So, there was no passive vs. aggressive discussion (because there wasn't much in the way of index funds). And to be sure, there wasn't an ETF to replicate every index known to man. No, index investing wasn't a thing yet.

But regardless of the financial math involved, the media still loves to make big deal about those big, round numbers.

So, for those who pay attention to such things, imagine the excitement coming into Monday's session as the DJIA was flirting with 16,000, the S&P 500 SPY was closing in on 1,800, the NASDAQ QQQ was flirting with 4,000 (something it hasn't done in at least a decade) and while, considerably less important, the S&P Midcap MDY was just above 1,300. In short, if a big, round number is important, then four of them must be monumental, right?

Case In Point

Five minutes after the opening bell on Monday, the DJIA had broken on through to the other side of the semi-magical 16K level and all was right with the world. However, once Carl Ichan started yammering on about the idea that stocks are expensive, a series of sell programs materialized and within minutes, the financial anchors were nervously talking about the market's failure to hold those all-important levels.

Sure, the decline was algo-induced. Yes, it is true that the negative catalyst was (a) hard to identify and (b) of very little substance. But the bottom line in this game tends to be the bottom line. And the bottom line here was that the major indices all failed to close above those big, round numbers.

Why Does Anybody Care?

One of the reasons that some folks care about these so-called market milestones is they represent an external cue to take action. For example, if you believe that stocks have run too far, that valuations are too high, and that the only reason stocks continue to go up is an addiction to monetary meth, then a big, round number is a logical place to take a stand.

Given that the market has indeed enjoyed a strong run and that some valuations measures are becoming a bit stretched, Monday's big, round numbers represented a nice spot for the fast money, gambler types to take a shot at some downside.

Everybody knows that all good things come to an end at some point. Everybody knows that this bull move is getting long in the tooth. And everybody knows that if the market "fails" at a big, round number, disappointment ensues. Thus, those looking to slip into their bear costumes for a trader were likely eyeing Dow 16,000, S&P 1800, and NASDAQ 4000 - especially if they all were in play at the exact same time.

Who Will Prevail?

So, the question of the day is who will win this turf war? Will there be some additional downside action to test the bulls' mettle? And if so, will the dip-buyers continue to do their thing? Or will the bulls simply continue to trample anyone in their way into the end of the year (it has happened before)?

So stick around, because with not one, not two, not three, but a total of four big, round numbers in play, this is about to get interesting.

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Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Fed Policy
      2. The State of the Bull Move
      3. The Outlook for Economic Growth

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month) Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months) Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

The State of the Tape

The Early Warning Indicators

The State of the Market Environment

Weekly State of the Market Model Reading: Moderately Positive

Thought For The Day...

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Key Technical Areas:

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• Near-Term Support Zone(s) for S&P 500: 1775
  
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Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Positive
  
• Price Thrust Indicator: Moderately Positive
  
• Volume Thrust Indicator: Neutral
  
• Breadth Thrust Indicator: Neutral
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups: Neutral

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

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