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Time for Dow Jones Industrial Average to play catch-up?


The Dow Jones Industrial Average recorded its 13th straight day of gains yesterday, marginally missing the longest winning streak on record by 1-day established during the first half of June 1897. The 13-day INDU rally tied the mid-January 1987 rally that preceded the October 1987 stock market crash (program trading debacle).


Should investors be concerned that this is the start of a bear decline?


Although INDU missed the milestone, it is notable that the blue-chip average is finally participating in the stock market rally, playing catch-up to the rest of the market. The catch-up also suggests investors are returning to the marketplace, as evidenced by expanding breadth and broadening leadership in stocks and sectors. Above developments bode well for the continuation of the Oct 2022/March 2023 bull rally.


The biggest difference between INDU and S&P 500 and Nasdaq Composite Indexes remains the influence of the Magnificent Seven technology giants in the respective indexes. The increase in weightings toward the top seven NDX stocks has forced Nasdaq to perform a special rebalance to redistribute the weightings.


Another significant difference between the indexes is INDU remains price-weighted as opposed to market-cap-weighted (SPX, COMPQ, and NDX). The highest INDU-priced stock, currently UNH (505.23), is 16 times more influential to the average than the lowest INDU-priced stock (WBA – 30.63).


Despite the impressive gains over the past three weeks, INDU continues to underperform its peers. INDU has appreciated 6.48% year-to-date as compared to SPX (+18.65% YTD), COMPQ (+35.27%), and NDX (+42.37%).


Does this imply INDU is a value call that will soon attract the attention of long-term investors?


Several studies suggest a rotation into INDU is occurring.


The Relative Rotation Graph (RRG) study for the eight (8) weeks ending July 24, 2023, shows visible leadership shifts within the INDU average. For instance, MSFT, AAPL, and CRM have slipped into the Weakening Quadrant, suggesting near-term consolidations. However, three (3) other technology names in INDU have entered the Leading Quadrant, signaling a change in technology leadership.


Interestingly, three (3) technology names are value-related technology names, including INTC, IBM, and CSCO. Two (2) Industrial names (CAT and HON), two (2) Financial names (JPM and AXP), and one (1) Consumer Discretionary (HD) are INDU names residing in the Leading Quadrant. Five (5) INDU names (AMGN, MMM, GS, UNH, and JNJ) remain in the Improving Quadrant, suggesting improvements in the Healthcare sector.

Another SCTR study of INDU also shows six (6) of the top 10 SCTR scores situated in the Technology sector, including CRM (SCTR 91.4), AAPL (90.2), MSFT (82.7), INTC (72.1), IBM (70.9), and CSCO (67.6).


The daily INDU chart confirms two recent head and shoulders breakouts. Above the neckline resistance at 34,588-34,712 hints at the next INDU rally to 36,952 (1/5/22 all-time high) and above this 37,995 (Nov 2022 h/s bottom breakout projection) and 40,764 (Jan 2022 h/s bottom breakout target). A negative outside day (7/27/23) and a modest overbought condition warns of near-term consolidation to the previous breakout levels at 34,589-34,712 and below this 34,017.5 (50-day ma).


In summary, although a near-term consolidation can still develop, expanding INDU market breadth, healthy INDU rotations, favorable RRG and SCTR studies, and the recent head/shoulders breakouts hint at further upside for INDU as the blue-chip average catches up to its peers.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com


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