On Wednesday afternoon last week the FTSE 100 (FTSE: ^FTSE - news) ticker on my computer moved above 6,091. To most normal people, this random-looking number won’t mean much. To a nerd like me, however, it felt like a watershed moment.
It meant we had moved past the level the UK’s benchmark index reached in February 2011 before the Tohoku earthquake brought the post-crisis market recovery to a dramatic halt.
By clearing that level, the FTSE moved into territory it has not been in since May 2008 and the pre-lapsarian world before a certain Lehman Brothers collapsed. Does this matter? It’s just a number after all and most people’s lives probably feel very much the same today as they did last Tuesday.
I can think of two reasons why Wednesday was just another day in the market but, first, two reasons why it might have been more significant than that.
A key concept in the toolkit of a technical analyst, or chartist, is the idea of support and resistance the tendency of shares or markets to change direction both up and down at prices where they have done so in the recent past.
It’s as if they are hitting against a ceiling or bouncing off the floor. While these supports and resistance levels hold, the price or market looks like it is trading within a clearly defined channel. In the case of the FTSE 100 it has bounced around between about 5,000 and just over 6,000 for more than three years now.
Not only did the FTSE fail to clear 6,100 in early 2011, it came close again in March 2012 before heading south. At the bottom end of the channel, the index bounced off or close to 5,000 in 2010, 2011 and 2012.
To see why breaking through the previous high matters you have to look behind the dry numbers to the daily, sometimes agonising decisions individual investors have to make about their investments.
Technical analysis is, after all, no more than an attempt to explain in numbers and charts what is much more interesting, the psychology of investment.
The reason why resistance levels hold is that they reflect points in the past at which investors bought and subsequently suffered losses. Getting back to that purchase price presents the investor with the opportunity to get out again at no net loss.
Now (Other OTC: NWPN - news) , a cool and rational investor clearly wouldn’t think in these terms. He or she would assess the investment with no reference to the price he or she paid in the past but, even if that cool and rational investor existed, he or she would be sufficiently out-numbered by real human beings and the resistance would be more than just theoretical.
So, when a price breaks through a previous resistance level, it really is more than just a number. It is an indication that there are no longer enough nervous investors left in the market just looking to get their money back again.
That shift in the balance of buyers and sellers can be enough for the share or market to move on to test the next resistance level.
The second reason why Wednesday was significant is again psychological. By throwing their minds back to 2008 and the pre-crisis world, investors can finally allow themselves to think that maybe, just maybe, we are through the worst.
The crisis may not be resolved but the healing process is well under way. That is an important change in sentiment.
So, I think the past week’s breakthrough is significant but, for a couple of reasons, it would be wrong to get hung up on the move above 2011’s high.
The first is that the stock market is better thought of as a market of individual stocks than a single monolithic entity. People do not, as a rule, buy the market but the individual shares within it.
As we move into the fourth quarter earnings season, individual results announcements are a reminder that a company’s share price is in the long run determined by its ability to increase its profits and pay its shareholders a dividend. The FTSE is just an aggregation of all these separate prices.
The second reason is that the FTSE 100 index is simply a measure of the capital value of a group of shares.
Our investment performance is better measured by a combination of capital and income, the reinvestment of which makes an often overlooked but massive difference to our investment outcomes.
On this total return basis, shown in my chart this week, we have been hitting new highs for a couple of years now.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63