I recently discovered an interesting research paper entitled “Stock Market Trading activity and Returns Around Milestones“. The authors studied the relationship between daily stock market trading volume and the Dow Jones Industrial Average (DJIA) price movement near 1000-point Dow milestones. They analyzed the time period from 1960 through 2005 and found that when the DJIA was within 1% of the nearest 1000-point Dow milestone:
- Aggregate trading volume was 4% lower.
- Stock returns showed a negative abnormal performance of minus 10 basis points per day.
At first, the milestone effect is somewhat surprising, since standard economic theory would suggest that an index level should not affect a rational investor’s decision making process. But a Dow milestone receives an unusually large amount of media coverage, and this could affect some investors outlook toward the stock market. The authors of the study did not find that milestones for the S&P 500 or other indexes were significant.
I took a look at some of the recent Dow Jones milestone dates. The Dow first reached 10,000 on March 29, 1999. So in the last 11 years, a DJIA investor has basically earned nothing except for dividends. From that point, the Dow quickly passed 11,000, then dropped back and then established several more milestones in 2006/2007. All of these gains were given back and then some in 2008/2009 when the Dow fell below 7,000.
- 11,000: May 3, 1999
- 12,000: October 19, 2006
- 13,000: April 25, 2007
- 14,000: July 19, 2007
On a longer term basis over the last ten years, it almost seems like Dow 10,000 is acting like a magnet. The next few days will be interesting because we are entering a seasonally favorable end of month period, and the new Russell 2000 members will be decided. These two effects will be combined with the breach of the Dow 10,000 milestone.