The Dow's break above 18,000 this week could well point the way to further gains.
Opinions on Wall Street certainly appear to be divided on the significance of indices rising above round-numbered levels, such as the 18,000 that the Dow Jones industrial average rose above on Monday. Some say that "psychological importance" is tied to these levels. The thought is that people may be led to buy stocks or to grow marginally more bullish as such a level is exceeded.
Others say that a number like 18,000 is no more meaningful than, say, 17,962 — with the only potential difference being that the former is more easily ballyhooed by the media than the latter.
A look at recent market history, however, would tend to support the former view.
An analysis of the actual significance of round numbers began by isolating the sessions in which the Dow traded above a new thousand-handle level at the high of the day. Then, the performance over the next 10 sessions was compared with the performance of the Dow over an average 10-session period.
It turns out that over the past five years, the Dow rose an average of 0.7 percent in the 10 sessions following the touching of a new -000 level. This compares with the average rise of 0.32 percent across all 10-day periods. The difference in median performances is just as stark, with a rise of 1.01 percent seen after the touching of a new round-numbered level, compared with 0.51 percent across all 10-session periods.
Superior performance following the tapping of round numbers also tends to be seen when 30-day performance is analyzed, as well as when longer or shorter time frames are considered.