Transports Chart Tells a Tale of Two Millennium Levels

10K has had a magnetic effect on DJT, but don't overlook the significance of 11K

Since it was first crossed last October, the 10,000 millennium level on the Dow Jones Transportation Average (INDEXDJX:DJT) has had exactly the kind of "magnetic" effect we often speak of when referencing these types of big round numbers. And it's probably fair to say that the move from 9,999 to 10,000 carries perhaps a bit more psychological heft than the shift from, say, 8,999 to 9,000, given that the former involves adding another digit to the index's value.

In that regard, DJT's inability to stray too far from 10K for too long is less than surprising. The index first touched this millennium level in intraday trading on Oct. 4, but ultimately closed below it. As soon as Oct. 12, the transports took out 10,000 on a daily closing basis for the first time, but crossed back into "four-digit" territory by the next day's close. The convincing breakout above 10K didn't occur until Nov. 29, and DJT has yet to suffer a daily close below this level since -- although an intraday breach took place on Feb. 9, when the index set an intraday low just above 9,800.

More recently, the index twice dipped toward 10,100 at its March lows, suggesting that crucial "fifth digit" could soon be vulnerable. However, in historical context, the move by transports above 10K has been particularly robust so far.

Data analyzed by Schaeffer's Senior Quantitative Analyst Rocky White shows that DJT is typically positive over a three-month period 64% of the time, with an average return of 2.58%. In the three months after DJT first crosses above a millennium level, the index outperforms itself by a slim margin, with 80% positive returns and a 2.95% average return. But three months after that Oct. 4 intraday cross of 10K (just after the New Year), the DJT was trading higher by 9.06% -- more than triple its own average "post-initial millennium cross" performance.

And as it turns out, the six-month mark for post-10K cross returns rolls around this Tuesday, April 3. Historically, an average DJT return in this scenario would be 2.78%, which is substantially lower than the index's average "anytime" six-month return 5.12%. As of Friday's close, though, DJT was up a comfortable 4.78% from its Oct. 4 close. So while the three-month burst of outperformance following an initial millennium cross is predictably fading, DJT is still pacing for a considerably bigger-than-average gain as we enter the final two sessions of this six-month period.

In other words, DJT's post-10K performance has been somewhat stronger than expected thus far -- meaning that if the high-volatility chop in the market were to continue, a significant breach of this level by DJT would be justifiable cause for concern on the part of stock market bulls. And that's particularly true given that the 10,000 region is also currently home to DJT's supportive 200-day moving average, as well as a roughly 10% year-over-year return.

But even if the so-far-stalwart 10,000 level doesn't give way, there's a different kind of "risk" involved in DJT undergoing a prolonged period of choppy chart action from here. The transports raced above another millennium level -- 11,000 -- in the early days of January, then tumbled back below by the end of that month. And White's study shows that when DJT tries to rally back above a millennium level after three months or more beneath it, the index undershoots its average returns over time frames ranging from one week (-0.55% vs. +0.20%) out to six months (+0.95% vs. +5.12%).

Aside from the pure underperformance of average returns, the standard deviation of returns is consistently lower, as well -- suggesting that the longer DJT spends below 11K, the more likely it becomes that this big round number will emerge as a serious "sticking point" for future rally attempts.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, March 18.