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What's The Deal With Big, Round Numbers?

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What's The Deal With Big, Round Numbers?

The media's fascination with round numbers on the major indices - especially the Dow Jones Industrials (NYSE: 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 (NYSE: SPY) was closing in on 1,800, the NASDAQ (NYSE: 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 (NYSE: MDY) was just above 1,300. In short, if a big, round number is important, then four of them must be monumental, right?

Related: Does Yellen See A Bubble In Stocks?

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 Icahn 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.

Related: What Kind of Bull Market Is This Anyway?

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.

Click Here For More "Daily State of the Markets" Commentary

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)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Near-Term Support Zone(s) for S&P 500: 1775
  • Near-Term Resistance Zone(s): 1800

The State of the Tape

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

The Early Warning Indicators

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.

  • Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is overbought from an intermediate-term point of view.
  • Market Sentiment: Our primary sentiment model remains Negative .

 

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Moderately Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Thought For The Day...

"Remember that not getting what you want is sometimes a wonderful stroke of luck" - Dalai Lama

 

Looking for Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Got Research?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup.

The Risk Manager Report - Stay in tune with the market's risk/reward environment.

The “10.0” Report - These are the REAL best-of-breed companies.

The Insiders Report - See what the people who know their company's best are buying.

ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.

The SOTM 100 Portfolio - The top rated stocks in each market sector.

State's Market Models - Each week we quantify the "state of the market" with a series of models.

The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Mission Statement

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

 


 

The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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