The Dow Makes a Comeback


While the Nasdaq Composite index rallied to hit record highs and the S&P 500 index came within 1% of its all-time peak, the Dow Jones Industrial Average never got within 1,000 points of its January 26th all-time closing high of 26,616.71. Until Friday.

That was when it closed at 25,687.38, its highest since February 1st. It followed a rollicking two-day, 500-plus point gain for the granddaddy of all U.S. stock market indexes. The S&P 500 also has mounted solid gains that put it within 22 points of its February all-time high.

Wall Street gurus attributed the gains to reports that the U.S. and China were restarting trade talks after both countries slapped tariffs on tens of billions of dollars of exports. The Wall Street Journal reported both sides want to reach a deal by November, just in time for—surprise, surprise—the U.S. midterm elections,

Technicians have been watching the S&P closely as it has twice tried and failed to break through that previous high. It would need to do that for this bull market, which on Wednesday will be, by some measures, the longest in the past hundred years, to continue.

So, how does the Dow fit in to that picture?

The Dow is a quirky index. Launched in 1896, along with the Dow Jones Transportation Average, the Industrials measure the performance of 30 blue-chip stocks that have large market capitalizations and are selected by the editors of the Journal. But unlike the S&P, the Dow is not a market-cap-weighted index. It is calculated by adding the prices of the 30 Dow components and then dividing that total by a complex divisor, which is constantly changing to reflect stock splits, dividends, etc.

Index funds and exchange-traded funds (ETFs) overwhelmingly track the S&P, the larger Wilshire 5000, and the Nasdaq. But the Dow is the most widely reported on general-interest news broadcasts because it has big round numbers. It’s of great interest to technicians, especially those who use Dow Theory, which follows the Dow and its sister index, the Transports, for confirmation of big market moves.

It also is heavily weighted with big exporters and true multinationals, like Boeing, Caterpillar, 3M, Apple, Microsoft, and Nike. That’s why it has been particularly sensitive to the tariffs and trade wars President Trump has unleashed on China, Canada, Mexico, the European Union, and, lately, Turkey. I believe that largely explains the 1,000-point gap from its all-time high.

That gap could narrow very quickly on any news of big trade deals with Mexico (which may be in the works) and, especially, China. If it happens, there could be plenty of upside for this lagging old benchmark.