Mathematicians sometimes talk of the
Strong Law of Small Numbers
-- that there simply aren't enough small numbers out there (one, two, 1 million) to meet the many demands made of them. What, then, of the demands we put on numbers that are round and, by our lights at least, big? Surely they are somewhat excessive.
With the prospect of the
Dow Jones Industrial Average
hitting 10,000, one starts thinking about this stuff. What can it matter that a 30-stock index is about to hit another milestone?
Even chartists cringe when they hear talk about support levels and the like on Dow -- it's simply not a deep enough index to have that much bearing on the overall market. It does not help, either, that Dow futures aren't traded very heavily.
Contrast this to the
. Until its recent break, it was trapped in a range of around 1215 to 1275, and it bounced off those limits several times. One of the reasons for this is that people who trade the S&P 500 futures contract believe in the charts. So do foreign exchange traders -- many's the time you can watch dollar/yen pop off some Fibonacci retracement level or another. And in Japan, where candlestick charting was developed in the rice and azuki-bean markets some 400 years ago, a golden cross is often a damn good reason to buy something.
The more the people trading in something believe in technical analysis, the more important technical analysis becomes in trading that thing. And, by the same token, the more weight people give to a milestone, the more important that milestone becomes. Maybe we shouldn't take 10,000 lightly, after all.
"The Dow's claim to fame is
that it is the public's definition of the stock market," said John Bollinger, president of
. "So in that regard I think 10,000 has assumed an outsized importance."
Bollinger pointed out that not all milestones are equal. The S&P 500 had little trouble blowing through 1000, and 2000 on the
didn't raise much notice. On the Dow itself, 8000 and 9000, despite all the media attention, offered only slight resistance.
Dow 1000 was another story entirely, however, and the institutional memory of the difficulty the market had with that benchmark is one of the reasons there's some leeriness about 10,000. On an intraday basis, the Dow hit 1000 for the first time Feb. 9, 1966. A couple of years later it again neared the mark, but couldn't quite hit it. The measure finally closed above the millennial mark on Nov. 14, 1972.
It didn't stay there long. Soon the oil shock and a recession took the market lower. The Dow again spent time above the 1000 level in 1976, but with stagflation, that didn't last long.
"There were some important fundamental reasons why the market couldn't go higher," said Peter Canelo, U.S. investment strategist at
Morgan Stanley Dean Witter
. "The collapse of the dollar after the breakdown of
. Excessive expansion of the monetary environment through the late '70s." In short, 1000 became an important barrier because, by chance, it happened to be the mark where stocks kept on getting knocked silly.
That's the kind of thing that can give investors a complex, and it did. It wasn't until 1983 that the market finally broke through 1000 for good. "The Dow 1000 level was the central focus of trading on the upside for more than 15 years," said Bollinger.
It seems unlikely that 10,000 will exert that kind of pressure on the market. Canelo points out that the things that kept the market down -- inflation and the weak dollar -- aren't part of the picture today. Valuation is, of course, an oft-repeated problem. At 10,000, the Dow would have a trailing price-to-earnings ratio of 25.1. But this is a market that doesn't mind richer multiples than that. If the Dow had the same P/E as the S&P 500 -- 28.1 -- it would be at 11,481.
Still, all those zeros are a bit daunting. Bollinger thinks it will take a little while to break free of the milestone.
"Our own guess to what the action around this one is: We'll spurt through it, then pull back and trade at or near it while people get used to the idea of a five-digit handle on the Dow," he said.