BEHIND THE MONEY: History Shows Dow Gets Tired at 10,000, Other Round Numbers

Back in 2004, when the Dow Jones Industrial Average had returned above 10,000 once again, Smith Barney's Alan Shaw warned at a Market Technicians Association conference that we may be here for a while.

The legendary chart analyst was right, as the market stalled for two years until the housing house of cards kicked into higher gear in 2006 and sent the Dow catapulting to record highs. We all know how that ended up.

Shaw, now retired, recalled at that conference that he had a similar eerie feeling when he stood on the New York Stock Exchange podium to help ring the closing bell on March 29, 1999, when the Dow crossed above 10,000 for the first time ever and 'Dow 10,000' hats were being handed out with excitement on the floor. Even Mayor Giuliani was on hand sporting one. The tech bubble burst 12 months later making Dow 10,000 a distant memory once again.

Shaw's reasoning for his tentativeness around big round numbers is that you are only supposed to see one major secular bull market in a lifetime and for many of us, ours began in the early 1980s and ended in March 1999 on that first cross above 10,000. He cites frustrating bear-market rallies that tend to follow these large bull markets and peak at big round numbers for the Dow.

Andrew Burkly, chief technician at Brown Brothers Harriman currently, cites the same historical patterns seen in the the Dow at 100 in the 1930s and 1,000 in the 1970s. "These long secular bear markets have tended to gravitate around the 3 big number milestones," said Burkly. He believes that you can ride this most recent push through 10,000 with the Diamonds Trust Series, which mimics the movements of the Dow members. But that's just for a quick trade before an eventual return back to 10,000.

As for the fundamental reason behind this gravitation to round numbers, you have to think for a moment what happens around these levels. The big round number catches the eye of the retail investor who wakes up to it on his or her doorstep (or e-mail box) in the morning. He or she then reasons that stock investing must be back and starts to move money back into equities.

There has been $14.5 billion put into stock mutual funds so far this year, compared to a whopping $254.5 billion put into the safety of bonds, according to Morningstar. With the 'Dow 10,000" headlines and low bond yields, there's a lot of money that could rotate into stocks soon. The kicker is that the pros on the street will then sell into the retail flow. So we will see an initial push through Dow 10,000 and then a fade as the retail rotation dries up and hedge funds take their gains.

Maybe this is the start of the new major bull market for the next generation, but for many of the traders and investors today it sure doesn't feel like it. It feels like it's setting up for another quick round-number trade like the one suggested by Burkly above and then an eventual return to these levels.

But after all, 10,000 is just another number, so this all could be voodoo. But what isn't on Wall Street?

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