Dow Hits 13,000 — Now It’s Time for Round 2 of Bullishness

by James Brumley | February 21, 2012 12:05 pm

Dow Hits 13,000 — Now It’s Time for Round 2 of Bullishness

Score another one for the bulls. After a four-year hiatus, the Dow Jones Industrial Average has poked its had back above the 13,000 mark, and in so doing has stirred up a pretty decent chance of even further upside movement.

Dow13000 300x249 Dow Hits 13,000    Now Its Time for Round 2 of BullishnessYes, that’s right — it’s the obligatory “big round numbers are important psychological milestones” speech. Before you groan or make your way elsewhere, though, just know these “X thousand” hurdles for the Dow really are big deals. I have proof.

So if you’re not impressed by the feat today, keep reading. You might be in a moment.

The Precedence

Like I said, the Dow Jones index fought its way above 13,000 today, and as such is likely to inspire a whole new round of buying from those investors waiting for the market to prove its mettle.

Yes, the event should be irrelevant, especially to fundamentally oriented folks. Value is value, and neither the shape of the chart nor its level at any given moment should be a factor in where the market’s apt to go next. Yet these big, round numbers have been make-or-break lines too many times in the past to ignore today’s victory.

dow2005 Dow Hits 13,000    Now Its Time for Round 2 of BullishnessTake 2005 for instance. This was a couple of years into the recovery following the dot-com bust of 2001, and things were humming nicely. In early 2005, though, the Dow bumped into the 11,000 mark for the first time in four years and immediately turned tail. It didn’t come out of hiding again until very late in the year, and it really took several weeks’ worth of effort into the earliest part of 2006 to pull the blue-chip index over the hurdle. Once it cleared the 11,000 mark once and for all, though, there was no stopping it.

dow2006 Dow Hits 13,000    Now Its Time for Round 2 of BullishnessWe saw a similar scenario in 2006. As the Dow was approaching the 12,000 mark, a lot of traders were getting worried that the 11.6% rally had already gotten a little long in the tooth. But once the 12,000 level was cleared, it was like the bulls got a new lease on life. The Dow advanced anther 5.8% before finally taking a break.

That being said, the 12,000 mark ended up being doubly important for the Dow that year — the first time as a resistance line (to be broken), and the second time as a support line to rekindle the market when tested in March 2007. Old resistance lines have a way of becoming floors, and when they happen to materialize at a major round number, they’re even stronger than usual.

dow2003 Dow Hits 13,000    Now Its Time for Round 2 of BullishnessThe list goes on and on. The support at the 10,000 level was the only thing that kept the flimsy post-flash-crash rebound going in late 2010. The 14,000 level was pretty much where the bears drew their line in the sand back in 2007, jump-starting the selloff of the century. The Dow’s dance with the 9,000 mark got dicey back in 2003, but once it finally was hurdled in June and had time to get its bearings in July and August, that same line at 9,000 ended up being a great pushoff point for a 16.6% gain through the early part of 2004.

The point is, these big, round-number levels really have been significant in the past — some for the better, some for the worse.

The Prognosis

So is one day’s worth of thrust above the 13,000 level enough to say the Dow’s going to repeat the kind of bullish action we’ve seen in the past when other milestones were cleared? OK, I’ll confess — it might be a tad too soon to break out the party hats and balloons just yet. But in my experience, things like this usually are the way they seem to be on the surface.

Factor in the fact that stocks are priced about as cheap as they’ve been in a couple of decades[1], and I’m willing to take a swing on a longer-term breakout move materializing here … or at least very soon, now that the bulls have let the cat out of the bag.

Endnotes:
  1. cheap as they’ve been in a couple of decades: http://investorplace.com/2012/01/3-undervalued-stocks-to-buy/

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