We can’t blame pundits for trumpeting the approaching 20,000 level on the Dow Jones Industrial Average. After all, such huge round numbers are rarities in the stock market, and readers eat up those headlines. Still, I prefer to look at the charts, make my projections, and then live or die by my work.
Right now, Dow 21,000 looks to be the far more important target.
While there is an argument that round numbers act as support and resistance on the charts, I wouldn’t bet the house on them. Few traders make decisions this way because they know that if everyone looks at a big price level, it’s not going to be that effective.
Why? Because people will jump the gun and trade ahead of them, hoping to get an edge on everyone else. That is why the end-of-year Santa Claus rally now starts in November, the current Trump rally notwithstanding.
Here’s how I get to the 21,000 level, and it starts with a measure of the giant trading range that ended in July (see Chart 1).
For nearly two years, from late 2015 through this past summer, the Dow did not make any net progress despite a pair of sizeable swoons and recoveries. Short-term traders had fun, but long-term investors had little to show for their efforts.
However, after the Brexit vote in the United Kingdom, the market moved sharply higher to make an initial attempt to break out from its long pattern. It did not last long, as the bond market peaked about that time and started to drag income-oriented sectors of the stock market lower. The Dow stalled and eased back below its breakout level.
Then came the election surprise. The Dow took off to confirm its long-term breakout.
The size of the two-year range provides the upside target of 21,000 – ironically, another round number – which is the height of the pattern projected up from the initial breakout. Just keep in mind that it is a long-term projection and does not preclude a decent disruption, possibly after the Trump election honeymoon wears off and the market is finally faced with a rate hike by the Federal Reserve this week.
To be sure, it is possible to torture a chart, as with statistics, to make it say what we want. Some chart watchers might use different highs and lows to construct their patterns based on differing but equally valid techniques. That is why it is a good idea to confirm any projections with other methods.
The monthly chart shows a trend channel drawn from the end of the last bear market and its upper border crosses the 21,000 level in about four months (see Chart 2).
I think this is more of an argument why 20,000 isn’t technically important than why 21,000 is. That‘s the point I’m trying to make here, not create a big prediction as to where the market must go.
The last confirmation comes from the Standard & Poor’s 500 index. The S&P 500 offers a very clear view of the secular pause in effect since the technology bubble burst more than a decade ago (see Chart 3). The 2000 and 2007 peaks were roughly the same, and the 2003 and 2008 bottoms were also close. That created a recognizable and really huge sideways range.
For students of the market, it also illustrates very clearly the difference between secular and cyclical bull and bear markets. The roaring secular bull market in the 1980s and 1990s morphed into the secular bear market of this millennium, with its cyclical bull and bear phases. (We can debate whether the secular bull has already resumed in a later column.)
Applying the same measuring techniques, we project the pattern height up from the breakout level. That gives us an approximate upside objective of 2379 (the index traded at 2253 Monday).
In order to translate this into Dow points, we simply find the ratio of the Dow to the S&P 500 today, which is about 8.77, and then apply that ratio to the 2379 target to get 20,863.
The ratio does change over time, and it appears that it is actually on the low side right now based on recent history. A 9.00 ratio is possible in a few months, and that would lead to a 21,411 level on the Dow.
Basically, both projections point to 21,000, give or take a few hundred points, as a more technically significant level than the more aesthetically pleasing 20,000. But does it really matter for investors and what they should plan for today? The absolute level does not, but the idea that the stock market is in good shape for the next few months – if not longer – does.
Leave the numbers to wonky columnists like me. The real message is that barring any big shocks to the economy, the government, or the rest of the planet, the stock market is happy right now. Just remember that the path to 21,000 is not likely to be as straight a line as it has been since the election.