If you want to witness a purely psychological asset war, look no further than the 30-stock Dow Jones Industrial Average ($DOWI) and its primary tracking vehicle, the SPDR Dow Jones Industrial Average ETF Trust (DIA). As we move into this year, the world’s oldest stock index is suffering from a serious case of split personality.
On any given day, you can look at the tape and see one set of stocks flashing bright green, looking technically sound and ready to break out, while the other half look absolutely atrocious, bleeding capital and hitting multi-month lows. I’m encouraged by any signs that the market is starting to distinguish between stocks, as high correlation has been a theme of my opinions here for a while.
More Barchart news
However, the lack of follow-through in many Dow names could be a sign that these increases in value are rather a sign of weak hope. That is, traders aggressively jump into something that is both top-of-the-line and bad luck. But they tend to be renters, not owners. So the movements are fleeting. That’s probably what it looks like to me.
This internal friction has triggered a mechanical phenomenon that I cannot remember, at least to this point. Specifically, the Dow Jones is experiencing sudden, explosive single-day spikes on days when the tech-heavy Nasdaq ($NASX) is flattening or sliding lower. Financial media pundits immediately shout that the great rotation into value has finally arrived.
To me, he looks more like the Great Pumpkin of “Peanuts” fame.
But don’t fall into the headline trap. When we analyze and look at real long-term data, these short-term spikes are nothing more than tactical fakes. At least until now. Over time, the Dow Jones has failed to keep pace with the S&P 500 ($SPX) or the Nasdaq.
That said, its structure, which is more diversified, less tech-heavy, and lacks the massive overweight in Magnificent-7-type stocks, is giving some hope to DIA investors. Altogether, that is.
A closer look at DIA
Here is the DIA chart. This daily look shows what appears to be a real breakup. But outbreaks aren’t what they used to be. So I’m holding on to the idea of declaring a new era for Dow 30 investors. Frankly, I would like to announce this because I have grown tired of what I believe is a second coming of the dotcom bubble, which I believe will undoubtedly end with many investors disillusioned. I don’t use the word “certainly” often.
www.barchart.com
Let’s examine the best of DIA so far this year. Apple (AAPL) and Nvidia (NVDA) were the leaders at the start of this year, along with Amazon (AMZN) and Microsoft (MSFT), the other two Mag 7 names in the Dow. But this year, the resurgence of Cisco (CSCO), the impressive run of Caterpillar (CAT), and the successful avalanche of banking fees that Goldman Sachs (GS) has racked up, have them on top. And Chevron (CVX), of course, thanks to the outbreak of war with Iran. I’m looking primarily at the far right column here, the change to date.
www.barchart.com
The loser group is dominated by the fallen angels, so to speak. Once again in the far-right column to date are Nike (NKE) and Salesforce (CRM), well-known case studies in how the market can take out a former leader and ruin them. And American Express (AXP), the other Dow name in the category with losses of more than 15% year to date, has faced the threat of high-end consumers finally feeling the pressure.
www.barchart.com
The Dow is a collection of only 30 large blue-chip companies. Because the index is price-weighted, meaning companies with a higher nominal share price dictate the index score regardless of their actual market capitalization size, the performance gap between winners and losers creates massive and violent tug-of-wars.
When institutional liquidity flees extreme tech valuations, it treats some of those specific high-priced pillars of the Dow as temporary safe havens. But as shown here, DIA is heavy in its own way, it just favors the financial and industrial sectors. So on days like this past Thursday, where the stocks of financial companies lead, DIA steals the show.
www.barchart.com
The other side of the coin
But look at the other side of the ledger. The bottom half of the Dow looks like a corporate graveyard. However, some legacy giants are being completely dismantled. It’s hard to look at a chart like NKE here and be optimistic. Even being contrary to what I am.
www.barchart.com
There are many other weak charts within DIA holdings, including Home Depot (HD), another true blue-chip. But the other chip is more of a dent. That of the price of its shares.
www.barchart.com
This brings us to those occasional aggressive green days where the Dow Jones rises 400 points while the QQQ falls 1.5%. This is not a sustainable trend. It is a mechanical artifact of algorithmic hedging and programmatic risk-averse rotation. When a large-cap tech company like Nvidia or Apple hits a technical headwind, macro hedge funds don’t immediately turn to cash.
Instead, the automated programs instantly sell technology and buy the highest-priced liquid components of the Dow to neutralize their net long exposure to the market during the day. If your bullish argument is that “hedge funds will use us to protect themselves and our stock prices will rise,” you need to find something that won’t be forgotten in the headlines a week from now.
However, there is some joy in Dow-ville. Amgen (AMGN) is one of the DIA stocks that looks ready to rebound. But there still isn’t enough to convince me that there is too much weight on this venerable index.
www.barchart.com
For now, DIA can provide a minor dividend yield cushion and brief relative stability during a massive wave of technology-led liquidity. But it is not yet ready to rescue the stock market from a potential AI mageddon situation.
Rob Isbitts created the Roar Scorebased on his more than 40 years of experience in technical analysis. ROAR helps DIY investors manage risk and build their own portfolios. To view Rob’s written research, see ETFYourself.com.
On the date of publication, Rob Isbitts had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
