What is the Significance of INDU Outperforming SPX and COMPQ?

All three indexes measure the market performances of US equities. Three main differences among the indexes.

First, the Nasdaq Composite Index (COMPQ) and S&P 500 Index (SPX) are market capitalization-weighted indexes heavily skewed toward the biggest market-cap names. Unlike their counterparts, the Dow Jones Industrial Average (INDU) is a price-weighted index based on the prices of the 30 blue-chip stocks. A stock with a higher price will be assigned a higher weight within the INDU, influencing the direction of the index.

For example, the top 10 price-weighted INDU names are United Healthcare Group Inc. (UNH – 555.15) has the largest INDU weighting (11.06%), followed by GS (344.55 at 6.86%), HD (296.50 at 5.99%), MCD (272.95 at 5.51%), AMGN (270.42 at 5.49%), MSFT (232.17 at 4.73%), CAT (216.45 at 4.40%), V (207.19 at 4.20%), HON (203.75 at 4.11%) and TRV (184.46 at 3.65%).

Second, the coverage universe and sector allocation of the three indexes differ. COMPQ consists of more than 3,000 companies listed on the Nasdaq stock exchange. Nasdaq Composite primarily includes technology-based companies. The technology sector accounts for over 50% of the overall weighting. The top 10 COMPQ companies, dominated by mega-cap technology stocks, are slightly less than 50% of the overall weight of the entire index.

SPX consists of 500 large-cap stocks from 11 major S&P sectors and over 69 GICS industry groups. Because the components are the largest of S&P names by market capitalization, it is highly liquid and a broad benchmark proxy for the US large-cap equity universe.

INDU is a narrowed-based index comprising 30 well-established blue-chip stocks. INDU tends to be a safe market favored by defensive investors because of the high dividend-yielding and reputable large-cap names.

Third, each of the three indexes must satisfy specific criteria before being added. SPX has certain requirements, including having a minimum market capitalization of around $14.6 billion or more, being highly liquid, and having a public float of at least 10% of shares outstanding.

COMPQ has a more relaxed selection requirement, consisting of a broad selection of over-the-counter large-cap growth, mid-cap, or small-cap names.

The selection criteria for INDU comprises a mix of quantitative and qualitative measures, including stock must have an excellent reputation within its respective industries and a history of generating sustainable profits over the long run. Because it has only 30 components, INDU is a narrowed-based index concentrated within value-related large-cap names.

Valuations of the three indexes tend to be highly correlated over the long term, resulting in prices rising and falling together. However, depending on the economy, geopolitical, and macro conditions, one index may produce higher or lower returns than its peers. During robust economic periods and bullish markets, COMPQ and SPX generate higher returns than INDU. The opposites occur during economic slowdowns and bear markets as investors tend to favor the well-established blue-chip names in the INDU average.

Stock market performances have been stellar during October, with broad rallies across all stock market indexes.

INDU led with gains of 13.95% for the month, followed by SML (12.27%), MID (10.42%), NYA (9.46%), SPX (7.99%), OEX (7.06%), NDX (3.96%), and COMPQ (3.90%).

Year-to-date performances are similar to the monthly returns, with INDU relatively outperforming peers (-9.92%), NYA (-14.08%), MID (-14.39%), SML (-14.71%), SPX (-18.76%), OEX (-20.69%), COMPQ (-29.77%), and NDX (-30.11%).

INDU closed October at 32,732.95, or near the top of its intra-month range (32,889.81). The action confirms a bullish positive outside month reversal pattern.

Does this action suggest the Sept/Oct 2022 lows (28,716/28,670) is a pivotal market bottom?

The ability to maintain above the bottom of the 2009 structural uptrend channel (28,536) and the 50% retracement (27,583) from the 2020-2022 rally bode well for either an intermediate-term INDU recovery or possibly the resumption of the 2009 structural uptrend.

Although INDU has emerged as a market leader, as evidenced by the only popular stock market index to record a monthly reversal, there remains formidable resistance to rallies. INDU still must clear above the 30-mo ma and the 10-month moving averages (31,814/32,626) and, most importantly, surge above the Jan 2022 primary downtrends (32,979-33,385).

A higher high pattern above the 8/16/22 intraday high at 34,281.36 also helps to solidify the Sept/Oct 2022 lows as a crucial bottom and reaffirms an intermediate-term recovery toward 35,492-36,631 (2/9, 4/21/22, and 8/16/21 highs or the left/right shoulders) and 36,952.65 (1/5/22 all-time high).

Initial support rises to 32,504-32,643.5 (9/12/22 high and the 200-day ma) and below this 30,911-31,048.5 (9/6/22 low and the 50-day ma), 29,653-30,144 (Jun and Jul 2022 lows), and 28,716-28,661 (Sept and Oct 2022 reaction lows).

Improvements in technical indicators also merit attention. Volume remains relatively low during October 2022. The two previous market bottoms toward the end of the 2007-2009 global financial crisis/great recession crisis and the Feb-Mar 2020 Covid-19 pandemic bear decline witnessed higher volume. After three years of INDU/SPX relative underperformance, a recent breakout hints at the start of an outperformance cycle, at least near-to-medium term. A 10-plus year downtrend breakout in INDU/COMPQ hints at a structural shift toward value related in the INDU. Although the MACD price momentum indicator continues to trend lower, the pace of the decline may be slowing. Remember, the 2007-2009 global financial crisis/great recession and the Feb-Mar 2020 pandemic bear similar occurrences developed. The RSI overbought/oversold indicator is no longer declining as it has rebounded, and is now trading above the 50 neutral levels, suggesting either an INDU oversold rally or possibly the resumption of the INDU structural bull trend.

So, what is the technical significance, if any, of INDU outperforming SPX and COMPQ?

Does it imply a flight to safety and defensive positioning by investors?

Is the INDU outperformance this year concentrated in a handful of names (i.e., CVX +53.37% YTD, MRK +31.48%, AMGN +21.71%, AMGN +21.71%, TRV +16.32%, UNH +9.78%), masking the overall weaknesses of the other INDU stocks?

Is a structural shift developing as investors favor the value names within the INDU portfolio resulting in relative outperformance against peers?

Are interest rates peaking, the FED nearing the end of the tightening cycle, and economically sensitive Industrial related stocks showing early signs of recovery the reason for INDU’s outperformance?

Source: Courtesy of StockCharts.com