Bullish or Bearish? Dow Jones Averages are All Over the Place

All for one and one for all may have worked for the Three Musketeers, but it’s not working for the Dow Jones Averages.

All three Dow Jones Averages are pulling in different directions.

The Dow Jones Industrial is near its all-time high. The Dow Jones Utility just came off a nine-month low and the Dow Jones Transportation Average has been stuck in neutral for four months.

Here’s a look at all three averages and an attempt to interpret the meaning of the broad Dow Jones disharmony.

Dow Jones Utility Average (DJU)

The Dow Jones Utility Average (DJU) lost as much as 14% from January 28 to March 11.

On March 11, the Profit Radar Report noted that: “Utility stocks are down 13% from their recent high, and every stock component of the Utility Select Sector SPDR ETF (NYSEArca: XLU) is trading below its 50-day SMA. RSI is at a level that sparked rallies in June 2013 and August 2014. XLU trend line resistance is just below today’s close. Unlike XLU, the Dow Jones Utility Average already close below its trend line. Nevertheless, utility stocks are compressed and should soon spring higher.”

The latest rally started on March 12, and as long as support at 585 – 574 holds, DJU may continue higher.

Dow Jones Transportation Average (DJT)

The Dow Jones Transportation Average (DJT) has been stuck in a multi-month triangle, and is threatening to close below triangle support.

A break down below the ascending green trend lines has to be graded bearish (unless it reverses). Next support is at 8,800 and 8,600.

The iShares Transportation Average ETF (NYSEArca: IYT) tracks the DJT.

Dow Jones Industrial Average (DJI)

The Dow Jones Industrial Average (DJI) just fell below long-term Fibonacci support/resistance at 18,004, which is also where the 20-day SMA is.

This allows for continued weakness.

The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) tracks the DJI.

Bearish Divergences?

The lack of confirmation among the Dow Average isn’t a bullish development, but thus far the key U.S. indexes are not displaying signs of a major market top (for more details about the indicator that’s identified the 1987, 2000 and 2007 tops go here: Is the S&P 500 Carving Out a Major Market Top?).

Until we get the same kind of deterioration seen at prior bull market highs, divergences among the Dow Average may just be a distraction.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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S&P 500, Dow Jones and Nasdaq – The Deceptive Intricacies of Popular Stock Market Indexes

On first glance the performance of the Dow Diamonds (DIA), S&P 500 SPDR (SPY) and Nasdaq QQQ (QQQ) seems to be closely correlated. This first glance assessment, however, couldn’t be farther from the truth. Here’s what separates the indexes from each other and why it’s important.

Index investing or ETF index investing is a popular and low-cost way to put your dollars to work, it’s like putting your portfolio on cruise control.

But driving on cruise control isn’t always the best way to get from A to B and doesn’t mean you won’t get into an accident. It merely means that you delegate speed control to your car.

Your level of commitment to your own portfolio ultimately dictates your style of investing: buy and hold via indexes or ETFs, buy and hold via actively managed mutual funds, or a more active approach to buying and selling.

Regardless of what type of investor you are, you need to be familiar with your investment vehicle(s) of choice, just like a driver needs to know the difference between automatic and stick shift.

Look Under the Hood

The S&P 500, Dow Jones, and Nasdaq are the most popular U.S. indexes and if you are an investor, odds are some of your money is invested in one or more of those three indexes.

Equity indexes are often described as a basket of stocks. Retirees or near retirees are familiar with the term nest egg and the comforting picture of many golden eggs nested up to provide a comfortable retirement.

But what if the basket of eggs is made up of one or two giant ostrich eggs that limit the space for other eggs? That wouldn’t be well diversified and one knock against the basket could scramble most of the retirement.

Hidden Ostrich Eggs

Financial ostrich eggs among major U.S. indexes are more common than you think.

IBM accounts for nearly 12% of the Dow Jones Industrial Average (DJIA or Dow Jones). Technically speaking, the DJIA is an average not an index. The DJIA is price weighted, in other words only the price of a stock matters, nothing else.

IBM is the most expensive stock of the DJIA and moves the index (or average) 20x more than Bank of America (BAC) even though IBM has only about twice the market capitalization (the price per share multiplied by the amount of outstanding shares) of BAC.

The ETF that best represents the DJIA is the SPDR Dow Jones Industrial Average ETF. Its ticker is DIA, that’s why it has the nickname Dow Diamonds ETF.

The Nasdaq-100 and the PowerShares Nasdaq QQQ ETF (QQQ) hide another “ostrich egg,” – Apple. Apple accounts for a whopping 20% of the Nasdaq-100 Index. If you already own Apple or don’t believe Apple is the way to play technology, you may not want to own QQQ.

The S&P 500 Index – represented by the S&P 500 SPDR (SPY) – provides more balanced diversification than the DJIA or Nasdaq-100. Apple, still the biggest player of the S&P 500, accounts for less than 5%. IBM has a weight of only 1.8%.

Considering the different composition of the three indexes, it’s remarkable how closely their day-to-day moves correlate.

The chart below provides a visual of the long-term correlation between the Dow Diamonds (DIA), S&P SPDR (SPY), and QQQs. Illustrated is the percentage change since April 1999 (when the QQQs began trading) to provide an apples to apples comparison of the three indexes.

The SPY and QQQ delivered a near identical return (+38%). The DIA is up 68% since April 1999. Of course the picture looks much different if you start measuring the return from the 2000 highs.

All three indexes and index ETFs share the commonality of having had very sizeable swings ranging from -60% to +60%. The Profit Radar Report advocates an investment approach that capitalizes on larger up moves and turns neutral or short during major down moves.

This approach can significantly enhance your return and reduce your exposure to risk.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.