Where the NASDAQ Is Less Likely to Close At
Thursday, February 18, 2016

Call up a one-year chart of the NASDAQ Composite index and you’ll notice a line of support and resistance around 4,900. Extend the chart to cover three years, and a second support/resistance line appears at approximately 4,600. Those support/resistance areas may not be not completely attributable to randomness.

The authors of a manuscript accepted by the North American Journal of Economics and Finance found evidence of barriers existing in the NASDAQ Composite. The index is less likely to close near a level ending “00” than at one further away. Rather, the theoretical most likely close is at a level ending in approximately “60.” Statistically, the NASDAQ has a higher chance of closing at, say, 4,560 then at 4,600.

No matter how the researchers tested the data, they came up with the same findings: the index is less likely to close within a 10-point range of a number ending between 95 and 04 (e.g., 4,595 to 4,604). Even rescaling the index values did not refute their findings. Future analysis might, but for the period of 1990 through 2012, the researchers give evidence to the existence of such “barriers.”

It isn’t completely clear why, however. The authors expressed their belief “that the lack of a formal rational explanation does seem to indicate a behavioral underpinning.” They followed this statement with a concession about the difficulty of obtaining a verifiable causal link between investor sentiment and trading actions.

One reason I’ll suggest is anchoring. Retailers and others who sell directly to consumers have long known the advantage of pricing an item below just below the next dollar level, such as $14.95 instead of $15.00. Even for more expensive items, the strategy holds. A 15-inch MacBook starts at $1,999 instead of $2,000. Listing the computer for a dollar more won’t break anybody’s budget, but $2,000 sure feels more expensive than $1,999 does.

Compounding matters is that we humans are really bad about mentally calculating the absolute difference in numbers when it comes to financial decisions. Harvard professor Sendhil Mullainathan recently wrote in The New York Times about how people will scour the Web for a great price on a pair of jeans without considering the implications of paying an additional 0.25% in annualized expenses for a mutual fund (even though reducing fund fees by 0.25% annually allows you to buy many jeans at full price with the savings). Similarly, we might go out of our way to save $10 on a $50 pair of headphones, but will quickly agree to spend $200 extra on a better sound system for a new car costing $30,000 or more. Simply put, we view the numbers relative to what we’ve anchored in our mind.

The implication is that barriers may exist around 100 or 1,000 increments for the major indexes because we anchor the next level as being expensive (or cheap) relative to where those indexes are currently trading. There is no difference between the NASDAQ trading at 4,962 and 5,002; we just view the second number as being far bigger. That perception alone could create a level of resistance that the index will have to break through to reach new highs when it eventually recovers from the current slump.

Speaking of numbers, I goofed last week. I incorrectly stated that a 0.01% fee on $100,000 was $100. The amount should have been $10. The commentary on AAII.com has been fixed.

More on AAII.com

AAII Model Portfolio Update

There were no changes to the Model Shadow Stock Portfolio this month.

Thirty-seven stocks passed the Shadow Stock screen at the end of January, up from 36 at the end of December. Eight of the stocks in the portfolio qualified for purchase at the end of January. While this was the same number that qualified at the end of December, there were some changes.

Kimball Electronics (KE) and TravelCenters of America (TA) were added to the qualified for purchase list at the end of January. In addition, CSS Industries (CSS), Key Tronic Corp. (KTCC), Rocky Brands (RCKY), Seneca Foods (SENEA), Townsquare Media (TSQ) and Willis Lease Finance (WLFC) once again qualified for purchase at the end of January. Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)

Salem Media Group (SALM) and SigmaTron International (SGMA) no longer meet the initial purchase rules as of the end of January; Salem Media’s price fell below $4 and SigmaTron International’s market cap fell below $30 million. However, these stocks continue to be held in the actual portfolio until they meet one of the portfolio’s sell rules during a regular quarterly review.

The next quarterly review of the Shadow Stock Portfolio will take place at the beginning of March and will be discussed in the April 2016 issue of the AAII Journal.

No changes were made to the Model Fund Portfolio following this month’s quarterly review. A discussion of this review will appear in the March 2016 issue of the AAII Journal.

The Week Ahead

Several retailers will report earnings, including Dow Jones industrial average component Home Depot (HD) on Tuesday and fellow S&P 500 members Target (TGT) and Lowe’s (LOW) on Wednesday. A total of 50 S&P 500 member companies are scheduled to release their results.

The first economic report of note will be the February PMI Manufacturing Flash, released on Monday. Tuesday will feature January existing home sales, the Conference Board’s February consumer confidence survey and the December Case-Shiller home price index. January new home sales will be released on Wednesday. Thursday will feature January durable goods orders. January personal income and spending, January international trade data, the first revision to fourth-quarter GDP and the University of Michigan’s final February consumer sentiment survey will be released on Friday.

Four Federal Reserve officials will speak: Richmond president Jeffrey Lacker and St. Louis president James Bullard on Wednesday and Atlanta president Dennis Lockhart and San Francisco president John Williams on Thursday.

The Treasury Department will auction $26 billion of two-year notes on Tuesday, $34 billion of five-year notes on Wednesday and $28 billion of seven-year notes on Thursday. Additionally, $13 billion of floating two-year notes will be auctioned on Wednesday.

What’s Trending on AAII
  1. 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses

  2. The Cash Flow Statement: Tracing the Sources and Uses of Cash

  3. Increasing Retirement Withdrawal Rates Through Asset Allocation

AAII Sentiment Survey

After nearly reaching a three-year high last week, the percentage of individual investors describing their short-term outlook as bearish pulled back in the latest AAII Sentiment Survey. Nonetheless, pessimism remains above average and optimism remains at unusually low levels.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 8.3 percentage points to 27.6%. The rise reverses last week’s drop. It was not large enough, however, to prevent optimism from staying below 30% for a 12th consecutive week and below its historical average of 39.0% for the 48th out of the past 50 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 2.6 percentage points to 34.6%. This is the 55th time in the past 59 weeks that neutral sentiment is above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 10.9 percentage points to 37.8%. The drop reverses much, but not all, of last week’s spike. Even with the pullback, pessimism remains above its historical average of 30.0% for a seventh consecutive week and for the ninth time in 10 weeks.

One thing that continues to be notably absent is optimism. As previously noted, bullish sentiment is below 30% for a 12th consecutive week. The last time a similar streak was recorded by our survey was between June 11 and August 27, 1993. Optimism stayed below 30% during a stretch of 13 consecutive weeks in 1990 and 15 consecutive weeks in 1988.

During the survey period, the S&P 500 rose by more 1% on three consecutive days for the first time since October 2013. While this likely helped optimism rebound from last week’s very low level, many individual investors are still concerned about the slowing pace of economic growth in China, tensions in the Middle East, the pace of economic growth in the U.S., the rate of earnings growth and prevailing valuations. Some individual investors have increased their cash allocations, though there are others who view the recent downside volatility as a buying opportunity or are intending to buy should prices weaken further.

This week’s special question asked AAII members how they will know when the current downturn in stock prices has reached a bottom. Responses varied. The largest group, accounting for 29% of all respondents, said they’ll know either after a bottom has been set or technical indicators reveal an upturn in the market. Several of these members said they will look at price action for clues. The next-largest group (16%) said that either they won’t know, they don’t know or that they’re unsure when stocks will bottom. Nearly 13% think that a market bottom will coincide with oil prices either stabilizing (the majority within this group) or rebounding. Close to 10% are looking for signs of capitulation such as panic selling or headlines warning investors to be more cautious. Just under 6% of respondents are looking for a further decline in stock prices.

Here is a sampling of the responses:

  • “I don’t expect to recognize the bottom when it happens.”
  • “When my technical indicators begin to show favorable trends.”
  • “When oil prices stabilize or move up.”
  • “When there is massive selling in the market on a single day.”
  • “Wait for the market to make higher highs and higher lows.”
  • “There is no certain way to know. Timing the market is best left to psychics.”


This week’s Sentiment Survey results:

Bullish: 27.6%, up 8.3 points
Neutral: 34.6%, up 2.6 points
Bearish: 37.8%, down 10.9 points

Historical averages:

Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!