Why the Dow at 17,000 matters

You might think big round numbers are meaningless, but plenty of experts say they actually can influence the stock market.

By MSN Money Partner Jul 2, 2014 11:46AM
Caption: New York, Wall Street, bronze statue of charging bull
Credit: © xPACIFICA/Getty ImagesBy Victor Reklaitis and Wallace Witkowski, MarketWatch

The Dow Jones Industrial Average ($INDU) could punch through 17,000 and keep climbing.


Or the blue-chip benchmark might hit that milestone level, then struggle to break through and end up tumbling.


Another possibility is that big round numbers like 17,000 are meaningless, but plenty of experts say they actually do matter to the U.S. stock market. And this record level might even be bullish.


Terrance Odean, a finance professor at the University of California at Berkeley, anticipates the Dow reaching 17,000 will spur more buying.


"I expect that the biggest effect of hitting 17,000 is that the event gets news coverage and, in the process, reminds (or informs) investors that the market has been going up," Odean told MarketWatch in an email. "While this could prompt some people to sell, I'd expect it to trigger more buying than selling."


Why does Odean see buying?


"People like to chase trends," he said, "and people are more likely to buy when they are thinking about the market than thinking about something else such as the World Cup."


The Berkeley professor doesn’t see 17,000 offering up what technical analysts call "resistance." Odean notes that resistance often occurs because investors who bought a security at a particular price sell it once it regains or tops that price. (Other market watchers have described this as overhead supply.) But in the case of the Dow, it’s never reached this milestone before.


Few investors "buy the DJIA -- sure you can buy a DJIA ETF, but who do you know who does? -- and nobody has bought the DJIA at 17,000," Odean said. 


Richard Geist, head of the Congress on the Psychology of Investing, suggests big numbers like 17,000 should be meaningless, but the fact is they help us make sense of the financial world, so they end up having importance.


All investors "try to find ways to make meaning out of market events (even when they don’t have meaning) because that's the only way they have of containing their anxiety," Geist told MarketWatch in an email. "So we all generate emotional convictions, e.g. if the S&P reaches 1950, there will be a correction, or if the S&P reaches 1950, it will go to 2000."


Then these expectations end up spreading, Geist added.


"These emotional convictions . . . tend to be contagious, leading to herd mentality," he said. "So in reality, the numbers are meaningless, but will always remain emotionally significant except for investors like Buffet who have found ways to recognize and put these emotional convictions aside."


Still not convinced about the importance of 17,000?


One academic paper has provided an extensive look into round numbers, studying more than 100 million stock transactions.


The paper's authors say they found excess buying "at all price points one penny below round numbers," as well as extra selling a cent just above round numbers. You can read the entire 45-page paper, produced by researchers at Indiana University and Southern Methodist, at this link.


More from MarketWatch

46Comments
Jul 2, 2014 12:46PM
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The dow is artificially being controlled right now. This economy can,t  support a good number without the taxpayer money being dumped into it as it is right now. Look out when that stops!, Enjoy it while you can and I hope you move your money in time.
Jul 2, 2014 1:09PM
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"Another possibility is that big round numbers like 17,000 are meaningless, but plenty of experts say they actually do matter to the U.S. stock market. And this record level might even be bullish."

Like I keep stating, there are NO Experts when Global Debt has soared 40% since the Great Recession while the original Problems were never Solved, only delayed for a Future Date of Reckoning. Aunt Yellen was spilling here normal FED Speak BS and Excuses today. They were and still are Ground Zero for most of the past, current, and future issues we shall face. Dumb and Dumber will always tell you otherwise.
Jul 2, 2014 1:23PM
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why the DOW matters. Without an actual working middle class there is little else supporting the economy. Chasing trends blah, blah, blah. Explain why the dow can stay near the same levels when our economy dropped over 2%? We are going to pay more for fuel while oil companies are wanting to export oil and one of our top exports is refined petroleum products. Our biggest producer of produce is going through a drought while our government demands that more of the acreage of another crop is used for fuel, further driving up the cost of food. The dow is going great because? Is it because a confidence game is the only game we have. I have most of my retirement tied up in stocks and I want the market to do well but it is like a one legged stool. Obama has been rated as one of the worst Presidents since World War 2 and Bush is right behind him. If anybody thinks it is a solely Dem./Rep. issue needs to slam there head with a toilet seat until their head clears.
Jul 2, 2014 1:04PM
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we've taken away two major investments, bonds and CD's, we've printed 10 trillion in new dollars the last 5 years between the fed and barry's programs. Of course high risk assets will appreciate in value. The problem is we've taken much money away from the middle class, the worker with new regulations that drive up prices and tax increases while wages stagnate. combined with 17 trillion in debt and all the experts talking about inflation and higher interest rates. Storm clouds are forming on the horizon.
Jul 2, 2014 1:44PM
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Take out QE and lets see what happens!
Jul 2, 2014 2:56PM
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As is obvious to everyone, the Dow (and market in general) has been propped up with a few trillion dollars in taxpayers money.

WHEN the market bubble pops, all that money will simply have vanished into the same thin air it came from....... EXCEPT that we, the taxpayers, will owe the bill for all the trillions in 'borrowed' money, that never even truly existed.  It appears to have been a deliberate and intentional attack on the American economy and our future.

What the obamination and company have done is nothing short of treason.

Jul 2, 2014 1:20PM
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That market is full of $##t. Driven daily and manipulated from story to story on the Internet. Nothing but a rigged shell game.
Jul 2, 2014 2:13PM
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Pull that $85 Billion a month the FED pumps into the Stock Market ?  Then you will get a real dose of Reality ?
Jul 2, 2014 5:07PM
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Breaking 17,000 isn't important to Americans, stopping the Fed funding of Wall Street is. This has to stop, we are dying nation because of it. 
Jul 2, 2014 12:39PM
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plenty of people including me own the dow............we own the DIA which pays us a monthly dividend.
we are the ones you can't beat with your crappy individual stock picks.........what a hack

Jul 2, 2014 2:26PM
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owning the dow sure beats your AA you picked at 18 3 yrs ago and the 1900 gold you said everyone should have in their portfolio
Jul 2, 2014 3:13PM
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wouldn't put a nickle into that rigged system.
Jul 2, 2014 4:04PM
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Things have really changed in this country. Rates for CD's and Savings accounts are null.

Private student loans that were 3.75 are gone and now they are gov. loans at 8%. Kids have 60,000 dollars of student debt when leaving college and it will take them to 40 to pay it off, so they will not be buying homes or saving much.  Most of the degree's except for engineering will not be worth the money spent. Maybe go be an electrician? You would not have as much debt and make more than 30,000 a year. Go up to North Dakota and do some surveying for 160,000 or 90,000 for a labor job. Leave your family home because it is not a good place for them... all changing...

Jul 2, 2014 2:46PM
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17000 would be a very good reason to sell more stock.
Jul 2, 2014 4:50PM
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Anybody got a pin? OK stand back! Here goes!
Jul 2, 2014 2:39PM
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Hope for some pocket change when the rent comes due

Jul 2, 2014 4:02PM
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Here's a question: are the people who are screaming that the sky will fall the same bunch who said much the same thing about Y2K?
Jul 2, 2014 4:23PM
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You read all the doom and gloom comments and they are just that...doom and gloom comments.  If you were in the market and stayed in after 2008, you would have been a fool to listen to all these idiots and bail.  I have heard nothing else from these people for the last 10k points in the dow.


Being in cash is a guaranteed loss.  Guaranteed.  Inflation will eat you alive over time.  And time, through all the market cycles is what is on your side.  My advise.  If you are in, stay in.  If you are out, average your way in over 6-18 months.  Two to three index funds from either Vanguard or Fidelity will capture the entire world's equity markets at almost zero cost.  Hard to beat that.

Jul 3, 2014 8:44PM
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is nice that you bulls can celebrate the big # 17000 bulls dance, for me is a sing to prepared for the biggest depression our nation will ever face. congratulation keep dancing.
Jul 2, 2014 2:01PM
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Yellin is starting to flirt with the notion of pulling back on QE.  I plan on staying in the market until the SP pe ratio climbs to 40+. 
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