The Dow Jones Industrial Average (DJIA) has been one of the hottest major stock indexes in the market. It seems to make a new all time high every trading session. The highly popular index is now flirting with the 33,000 level. It should be noted that the Dow Jones Industrial Average (DJIA) is made up of 30 blue chip companies. The index is also price cap weighted, unlike the S&P 500 Index and the NASDAQ Composite which are market cap weighted. That means the higher priced stocks in the DJIA carry more weight than the lower priced stocks. Either way, the DJIA has been a powerhouse in the month of March.
Throughout the years of trading and investing you will pick up correlations and observations along the way. I’ve always noticed that the markets are really stronger when the NASDAQ Composite and the Russell 2000 Index made new highs simultaneously. Often, when the DJIA takes the leadership role it is usually a sign of a market that is close to topping out. Now please understand, there is a lot of liquidity in the system right now. After all, we have massive amounts of stimulus from the central banks around the world including the Federal Reserve in the United States. It seems that every time the markets fall a little bit the central banks intervene with another liquidity program or even just jawbone the markets right back up. So calling a top is extremely difficult when you have this type of participation from the central bankers.
Why would DJIA leadership be a negative for the markets? You see, when money flows into the DJIA the institutional crowd are really just buying 30 blue chip stocks. These stocks are considered the best of the best, so even if the markets decline they will likely still remain a viable equity. These stocks also pay steady dividends and if you wanted to weather a storm or stock market decline you might want to park money here. Now when you buy the NASDAQ or Russell 2000 Index you are usually looking for growth not dividend income. You are taking on much more risk. Recently, the NASDAQ has been coming under distribution, but the DJIA has been steadily making new all times highs. We shall find out soon if this is a problem for the markets.
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