The Dilly-Dallying Dow


Commentary: Perception of a Barrier May Create One

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What took it so long?

I'm referring, of course, to the number of days the Dow took to close above the psychologically important 11,000 level -- a feat it finally accomplished, though barely, on Monday.

If the Dow's dilly-dallying was caused by nothing more than the routine difficulties of breaking through a resistance level, then the stock market should exhibit abnormal strength in the next couple of days -- now that this resistance level has been broken.

If, in contrast, the market was bogged down by something more serious, then stocks' behavior in coming sessions could very well be anemic at best -- and possibly much worse.

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I base these comments on a fascinating 1993 study, "Price Barriers in the Dow Jones Industrial Average," which was published in the academic Journal of Financial and Quantitative Analysis. The authors were Glen Donaldson of the University of British Columbia in Vancouver and Harold Kim, who at the time was at Princeton.

The two researchers carefully analyzed the past behavior of the Dow Jones Industrial Average (NYSE: ^DJI - News) as it approached round numbers, such as 100 or 1,000. They theorized that if such round numbers did represent genuine barriers, then the Dow's behavior in the vicinity of those barriers would have been different than its behavior when it was well above or below those levels.

For example, it on average should have taken longer for the Dow to move through a multiple of 100 or 1,000 than through any other level. And by the same token, once a barrier was broken, the pace of the Dow's change should have become faster than average.

This is exactly what the researchers found.

The researchers next conducted the identical test for the Wilshire 5000 Total Market Index, reasoning that few investors have been aware of that index's level. That certainly seems a reasonable assumption; after all, how many of you are aware of where it closed on Monday, the day when the Dow finally closed after the 11,000 level? (The answer: 12,357.20.)

Unlike what they found in the case of the widely followed Dow, the researchers found no abnormal trading patterns in the market whenever the Wilshire 5000 approached a multiple of 100 or 1,000.

This finding reinforced the researchers' belief that it is the psychological perception of price barriers that creates those barriers.

What this research means for the market for the rest of this week: If Dow 11K was nothing more than a psychological barrier, then the stock market should rocket forth in coming days to catch up with where it otherwise would have been had that barrier not held it back.

If, in contrast, the Dow's recent struggles represent more serious problems than merely the breaking through resistance, then look in coming sessions for a continuation of recent behavior -- the listless meandering of a tired market.

Stay tuned.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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