Expect Dow 10,000 to Be a Ceiling Rather Than a Floor

The Dow Jones industrial average stands on the verge of 10,000, a level that few investors could have foreseen the index reaching in such short order when it was toiling in the mid-6,000s in March.

There is a reasonable chance that the Dow will cross the threshold into five digits in the next few sessions, although the odds against it have lengthened since the Federal Reserve issued its comparatively cheery assessment of economic conditions on Wednesday. Traders were initially pleased, sending the Dow past 9,900; then they had second thoughts and knocked it back to about 9,700 by the close on Thursday.

Crossing 10,000 would make a lot of front pages and be jawboned to death on CNBC. If history is a guide, however, it might prove to be a less-than-auspicious event. Such milestones in the world's most famous stock index - levels marked with a 1 followed by zeroes - often herald a reversal, not a continuation, of a rally.

The Dow first topped 1,000 in January 1966, trading above the line on two successive days but closing in the 990s. It was only a matter of time before it would close above 1,000 and stay there - a whole lot of time.

The first four-digit close did not come until nearly seven years later, and the index would not leave that level behind until nine years after that. Investors endured runaway inflation and three bear markets of 20 percent to 40 percent during the 16-year span.

Knock a zero off and the pattern is remarkably similar. The Dow reached 100 for the first time in early 1906 and then the Panic of 1907 cut the index almost in half.

It made many other forays above 100 but seldom lingered there until the mid-1920s. Then came the Depression. The Dow did not pass 100 for good until 1938.

The 10,000 level offers more encouragement to prospective buyers. The Dow ran right through it the first time it tried in early 1999, nearly reaching 12,000 by year's end.

But it went back under 10,000 on several occasions after that, including the bear markets of 2001 and 2002. Those events seemed like distant memories when the Dow soared to 14,000 two years ago - until the collapse this year to a 12-year low. Even after the enormous recovery, investors who bought the Dow when it first reached 10,000 a decade ago are still underwater.

Why do round numbers turn out to be disappointing so often and for so long? The fanfare surrounding the feat and the run-up to it may carry the index higher than fundamental factors warrant and so it may just be a case of reality reasserting itself. Investors may realize that nothing of substance has changed, creating a sense of disillusionment.

A reality-checking public might find a five-figure Dow high for an economy that is likely to keep losing jobs for many months and experience little or no growth in home sales, construction or prices. Then there is the post-stimulus hangover that will have to be reckoned with.

The explanation could be simpler: Some investors may decide that a round number is as good a place as any to set a target for taking the money and running. Maybe it's a combination of these and/or other factors.

The experiences of the last century do not mean that it will take until 2015 or 2031 before a four-digit Dow is consigned forever to history. But don't expect an immediate vertical run, either. We're in one now, and it looks closer to the end than the beginning. Even if the index reaches 10,000 this fall, there's a good chance that it will spend much more time below the mark than above it in the months or even years ahead.