The Tail that Wags the Dow

A. Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have a little shadow that goes in and out with me,

And what can be the use of him is more than I can see.

My Shadow by Robert Louis Stevenson

Violence. Mayhem. Catastrophe. If it bleeds, it leads the headlines of morning papers. While newspapers proclaim the latest affront and outrage to civilized living, business quietly heads to work. Where business goes, the Dow is sure to follow.

Along with the NASDAQ Composite, the market-weighted S&P 500 Index, and the broad Russell 2000 Index, the Dow the Dow Jones Industrial Average (DJIA) - is among the most closely watched, if NOT the most closely watched, benchmark indicating U.S. stock market activity.

The Dow is a price-weighted, scaled average index of 30 stocks. Yet these stocks are NOT only some of the largest in the U.S., but many of the most venerable ones as well. The Dow reads like a list of Who’s Who in corporate America.

To own a portfolio of Dow stocks is to own a slice of Americana, its culture and history. For these are the organizations that lead, shape and define us NOT simply as investors, but also as participants in the vibrant American progressive social experiment. Where we go, they go. Where they go, we go. And what a list it is! Each DJIA component has a rich and varied history of brave, ambitious, greedy, visionary and ruthless men with their growing armies of hard-working followers:

3M, Alcoa, American Express, AT&T, Bank of America, Boeing, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, ExxonMobil, General Electric, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, McDonald's, Merck, Microsoft, Pfizer, Procter & Gamble, Travelers, UnitedHealth Group, United Technologies Corporation, Verizon, Wal-Mart, Walt Disney

Although the DJIA is NOT a collection of the best investments of all time, anybody should be proud to own any one of them. Better still, any handful of them. For the list NOT only reflects where we have been as a nation, both in national and corporate development, but also where we are going, including new developing technologies and changing lifestyles. Stalwarts on the list include General Electric (added in 1907), ExxonMobil (added in 1928 as John D. Rockefeller’s Standard Oil of New Jersey), but also Procter & Gamble and DuPont (added in the ‘30s).

 

 

<img src="/media/images/user_15176/djia-monthly-2012_large.PNG" />

Figure 1 Ten-month SMA crossed over 100-month SMA on Monthly DJIA

Regular updates to the DJIA tune it as a magnifying glass of our changing, adapting and evolving personal and business lives. Recent changes since 2008 add health (UnitedHealth), computer networking (Cisco), insurance (Travelers) and banking (Bank of America) components to the index. So an investment in Dow stocks is an investment in the rich past and bright future of our country.

As much of a sentiment indicator as a reflection of changing consumer demand, and thereby corporate growth and profits, where we go, the Dow is sure to follow. The financial markets crack and the DJIA crashed to 6,600 (March, 2009). The government rescued the banks, automobiles and secretly injects over $15 trillion into the financial markets. The DJIA quickly recovered. We are in a new BULL market now. The DJIA is up 100% from the market bottom!

Whither the Dow

On the monthly charts, the DJIA futures are clearly in a long-term, steady-rolling BULL market. After slumping in 2011 with election uncertainty, the weekly charts are also BULLISH, with a double-bottom bounce off 12,471 support and now swinging higher to take out potential ceilings at 13,750. The daily chart is also BULLISH, with a double-bottom bounce off 12,500. A BULLISH indicator, the 10-day Simple Moving Average (SMA) crossed over the 100-day SMA six weeks ago. The DJIA trades above the 10-day SMA now and money flow is positive.  

Leading the Dow higher is Bank of America ). This darling of the administration’s TARP largess has doubled year-to-date (YTD)! Also beating the DJIA benchmark are such notable components as “housing is recovering” Home Depot (NYSE: HD), up 49%; entertainment giant Disney (NYSE: DIS), up 32% and banker JP Morgan Chase, ) despite its market manipulation shenanigans, up 31%.

 

The only horrible Dow performer is the beleaguered, “can any CEO save us” Hewlett-Packard-Compaq-Mercury amalgamation. HP ) is down 44% YTD compared to the Dow.

 

Beset by the fact that its chips are NOT in the best-selling tablet and smart phones (yet?), market leader Intel ) is also one of the few DJIA components NOT participating in this BULL market. It is down 14% YTD.

 

From a long-term investor's perspective, the Dow is very important. It indicates NOT only the overall direction of the stock markets, but also when investors should be protecting their positions (with trailing stop-loss orders), and when investors should be casting about for other defensive investment plays. Investors can bet on the direction of the Dow or hedge their entire stock with Exchange Traded Funds. The DIAMONDS (AMEX:DIA) ETF tracks the Dow. ProShares’ Short Dow30 (AMEX: $DOG) is an inverse related ETF. Buying it is a bet against the Dow. Investors can hedge their stock market portfolio, without selling their stocks, buy buying the DOG ETF; with this position, a downside move in the Dow could make money. 

 

Despite the fiscal cliff, despite European Union uncertainty, the BULLISH trend continues. Yet to determine where we and the DJIA are actually headed, one only has to look at the 30 underlying stocks, which make up the venerable index. Where the components go is where the DJIA goes. In forthcoming blogs, I will examine the individual stocks of the venerable index and their direction. Where they go, we go and there goes the Dow. Their tale wags the Dow.

 


Acolin has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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