Dow 25K, and other red herrings

In case you hadn’t heard, the venerable Dow Jones Industrial Average (DJIA) traded and closed above 25,000 for the first time yesterday, hitting this milestone a little less than a year after closing above 20,000 for the first time.

Let’s get this out of the way really fast: The fact that the Dow hits a big, fat round number has zero significance—other than the enthusiasm that might be triggered among investors who will be bombarded with news coverage of the event for around 24 hours. After all, it’s tough to argue the market was a dramatically different beast when the Dow was trading at 24,750—a level it hovered around for a good two weeks before breaking out of the upside of a tight trading range on Tuesday. Nor will things be dramatically different when the Dow reaches 25,250; it’s a 1% move either way.

Dow Jones Industrial Average (DJIA), 10/26/17 – 1/4/2018

Source: OptionsHouse

Just for kicks, the following table shows the Dow’s returns one, two, five, and 10 days after it first closed above several of the most “significant” round-number levels of the past 30 or so years. There’s not much to hang your hat on here. The Dow’s short-term returns after hitting 2,000 and 5,000 were consistently good at all intervals, but it stumbled after topping 20,000 for the first time in January 2017. Lest we forget, though, the market came roaring back last year, while nine months after the January 1987 milestone, the Dow suffered its worst one-day crash in history. Sure, it’s only a handful of examples, but since Dow 25K is just another finger, it may not be a good idea to attach too much significance to it, one way or the other. 
DJIA performance after hitting round-number milestones

Source: OptionsHouse (data)

The problem with all-time highs and various “firsts” is they don’t give you many past reference points for comparison—the kind of stuff that helps make informed trading decisions.

A better idea may be to focus on the market’s specific action right now—that is, what it’s doing, rather than the level where it’s doing it. For example, the table below shows the Dow’s median returns one, two, five, and 10 days after days like yesterday, that is: a day with a higher high and close that follows an initial 10-day (or longer) upside breakout. There have been 219 of these days since February 1985 (the most recent one was on October 3, 2017).

DJIA after 10-day breakout + higher close/high

Source: OptionsHouse (data)

Past performance, as always, doesn’t guarantee future results, but at least in this case there’s some historical comparisons you can sink your teeth into.

Bottom line: The Dow has the same potential—and risks—it did yesterday. The fact that it hit 25,000 doesn’t change anything.


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