SPX First Time Above 2000 and So Close to It: History Shows It’s Quite Common
Wednesday, 27 August 2014
The financial markets’ obsession with round numbers is one of the few irregularities which are consistently valid over time, across time horizons and across asset classes. It can be observed not only in the media headlines, but also in the actual market data.
With yesterday’s S&P500 closing above 2000 for the first time in history, one thing that might have caught your attention is the very pretty closing value of 2000.02. The .02 is just a coincidence. The fact that the first close above 2000 also happens to be so close to the round number level is less so.
Below you can find some simple historical data, showing the days when S&P500 closed above round hundreds for the first time and the days when the Dow Jones Industrial Average closed above round thousands for the first time.
- px_close_prev = index closing value the day before
- px_close = index closing value on the day it first closed above the round number
- above 100 / above 1000 = how many % above the round number level it closed on that day, as % of the previous day closing value
- day_perf = day close to close performance, as % of the previous day closing value
- px_close_next = index closing value the next day
- next_day_perf = next day close to close performance, as % of the current day closing value
Those occurrences when the first close was very close to the round number level are highlighted (green <0.1%; yellow <0.2%) and you can see that they have been quite frequent – just by looking at the values, without calculating any high statistics, it is evident that they are more frequent then they are supposed to be in the world of random.
On just one occasion on S&P500 (the 400 level in 1991) and none on the Dow did the indices close over 1% above the round number level on the first day (remember this when the Dow gets to
18000 19000 next month).
The median for the Dow is 0.17% and for S&P500 it is 0.31%. Furthermore, there have been 4/20 occurrences below 0.05% on S&P500.
One can also argue that not all these round numbers are of equal significance, with e.g. 500, 1000, 1500, 2000 S&P500 and 5000, 10000, 15000 DJIA being the “big ones”.
Of course, much further research can be done in this direction. You can look at the price action before (how the indices behave when approaching a big round number) and after (for example, if the round number level can be used as a subsequent support). When doing proper analysis, the changing historical volatility and/or range should also be taken into consideration. These things are beyond the scope of this quick observation.