Why It Took the Dow So Long to Eclipse 13K

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Feb. 29, 2012, 12:01 a.m. EST

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Well, the Dow finally did it.

The "it," of course, is closing above 13,000.

/quotes/zigman/627449 DJI 13,005.12, +23.61, +0.18%

The real story here, however, is not that the Dow finally did so "” but why it took so long. After all, it's been nearly a month since the Dow first came within 1% of 13,000.

The market's action over the next couple of days will be crucial in helping to answer this question.

If the Dow's tentativeness in recent weeks 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.

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 /quotes/zigman/627449 DJI +0.18%   as it approached round numbers, such as those ending with two or three zeroes.They theorized that, to the extent such round numbers represent genuine psychological barriers, 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.

Click to Play $(function () { $("#video_9CD2E0EE-4DF1-485D-9BC8-0BDD7A7AEE08").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('9CD2E0EE-4DF1-485D-9BC8-0BDD7A7AEE08', 'video_9CD2E0EE-4DF1-485D-9BC8-0BDD7A7AEE08', '287', '162'); }); }); Dow closes above 13,000

Stock indexes rise but give up earlier gains after a morning of choppy trading that follows mixed economic data. Still, the Dow ends up closing above 13,000.

For example, it should have taken longer on average 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 /quotes/zigman/123822 XX:W5000FLT +0.24%  , 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 Tuesday, the day the Dow finally closed above the 13,000 level?

(By the way: The answer is 14,242.61.)

Unlike 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 13K was nothing more than a psychological barrier, then the stock market should show more strength 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 of resistance, then look in coming sessions for a continuation of recent behavior "” the listless meandering of a tired market.

We'll know soon enough.

Click here to learn more about the Hulbert Financial Digest.

/quotes/zigman/627449 Add DJI to portfolio DJI Dow Jones Industrial Average 13,005.12 +23.61 +0.18% Volume: 114.49M Feb. 28, 2012 4:30p var embeddedchart681836909Chart = new EmbeddedChart('#embeddedchart681836909', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJI'); jQuery.data($('#embeddedchart681836909').get(0), 'embeddedchart', embeddedchart681836909Chart); /quotes/zigman/123822 Add W5000FLT to portfolio XX:W5000FLT Wilshire 5000 Total Market Index 14,242.61 +34.60 +0.24% Volume: 0.00 Feb. 28, 2012 5:30p var embeddedchart1063881902Chart = new EmbeddedChart('#embeddedchart1063881902', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'XX:W5000FLT'); jQuery.data($('#embeddedchart1063881902').get(0), 'embeddedchart', embeddedchart1063881902Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});

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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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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