Milestone mania

July 27, 2009

The S&P 500 index is approaching 1,000, Nasdaq is nearing 2,000, the Nikkei is above 10,000 and Dow could surpass 10,000 soon.

Welcome to the world of milestone mania, where investors give emphasis on nice round numbers.

U.S.-based wealth management firm Fisher Investments give a few thoughts on the milestones and the danger of having blind faith in them.

In ancient Rome, Emperor Augustus placed a pillar in the centre of the Forum, marking the starting point for a system of roads. The roads were marked every mile, or the distance covered in 1,000 paces (mille is Latin for 1,000), by a stone. These milestones became important markers to travellers, helping them sense the distance between two points and determine how far they travelled in relation to Rome.

“In investing, however, milestones are simply misleading. What do markets know of milestones—of beginnings, distance, and endpoints? Nothing—numerical milestones are meaningless to markets and have no historical forecasting power whatsoever,” Fisher says.
“If markets start creeping toward those higher, round numbers, don’t be surprised if technical analysis enthusiasts appear out of the woodwork, attributing vital significance to those levels—claiming reaching or not reaching those markers will show how markets will do going forward. This is faulty reasoning—ignore.”


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I’m not sure that your argument is entirely correct. Broadly speaking, over a mid to long-term investment horizon, milestones are indeed useless and a foolish thing to “put much stock in”. However, there remains the question about whether the (very) short term technical analysis by momentum traders can hold sway over price movements. If everyone is using the same tools, the same models, to forecast so called “significant” levels, then isn’t there the possibility that price movements become a self fulfilling prophesy as these traders react to what their models tell them? This seems to be particularly true with currencies, though perhaps your argument was about indexes for which the case is harder to make given their constituent components.

Posted by sjackson | Report as abusive

Look at the size of those feet! Must be Phelps.

Posted by Paul M. | Report as abusive