When Market Leadership Changes It Better Have Staying Power

Clearly, there has been a changing of the guard taking place in the stock market. Last year, it was the tech heavy NASDAQ Composite that led the major stock indexes higher. Growth stocks were all the rage and it really didn’t matter what the news was they surged higher. This year we have seen strength in the Russell 2000 Index. In fact, the Russell 2000 Index is up 18.0% this year. Small cap stocks started to heat up around late October 2020 and have soared higher this year. Now there is a shift of strength into the Dow Jones Industrial Average. The Dow Jones Industrial Average (DJIA) is only up about 8.0% this year but it has made new all time highs over the past 2 weeks. The market strength is now in the Dow Jones Industrial Average.

Traders should note that the Dow Jones Industrial Average is a price cap weighted index. That means the higher price stocks hold more weight than the lower priced stocks regardless of the market capitalization. The Dow Jones Industrial Average is also what the public looks at to follow the market. When someone comes home from work and turns on the evening news they hear about the Dow Jones industrial Average. Rarely will anyone even talk about the Russell 2000 or even the S&P 500 Index. The Dow Jones Industrial Average is what I call the public’s market index.   

The Dow Jones Industrial Average (DJIA) has been boosted by the surge in Goldman Sachs Group Inc (GS). As you know, the financial stocks have soared with the higher bond yields recently. Goldman stock is also one of the highest priced stocks in the DJIA. So this stock is carrying the most weight right now. J.P. Morgan Chase & Co (JPM) is also a big part of the move in the DJIA, but it is only priced at $161.00 a share, so Goldman Sachs is more important. 

The recent rally in the financial stocks has certainly helped lift the DJIA. Now traders must be careful should the financial stocks begin to decline or stage a sell off. Goldman Sachs Group Inc (GS) has now become one of the most important stocks to follow in the market. Now we will need to see if this financial giant has the staying power going forward. If this stock begins to break down at some point it could be the beginning of a larger market decline down the road. 

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