Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is a weighted index representing the stock price action of 30 of the largest U.S. corporations. The world’s most widely followed stock market index, the DJIA was created on May 26, 1896 by Charles Dow and Edward Jones. When it was first launched, the Dow Jones stood at 40.94.

The DJIA is calculated by taking the average price of the listed stocks and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers, and it changes frequently.

Much broader U.S. stock market indexes have since been created, including the S&P 500 index (which monitors the stock prices of the top 500 U.S. corporations); and the Wilshire 5000 (an index based on the market capitalization of 4,100 stocks actively traded in the U.S.).

The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the DJIA as an indicator of economic activity. If the index is hitting new highs, economic activity can be expected to be brisk in the next six months. Comparatively, if the index is falling to new lows, poor economic times could lie ahead. When news sources declare the markets up or down, they are generally referring to the DJIA.

What does it take to get included on the DJIA? There are no specific rules for inclusion; rather, there is a set of broad guidelines that require large, respected, substantial enterprises that represent a significant portion of the economic activity in the United States.

When the DJIA was launched, the index comprised 12 industrial companies.

Most of the original companies listed on the Dow are still in existence, though, after 100 years, not necessarily in the same form. Early industrial companies included: American Cotton Oil, American Tobacco, Chicago Gas, Tennessee Coal Iron and RR, U.S. Leather, and United States Rubber. The only component still trading in its original form and currently on the DJIA is General Electric Company (NYSE/GE).

In 1916, the DJIA was updated to 20 stocks. Some of the new companies included: American Beet Sugar, American Locomotive, Goodrich, Republic Iron & Steel, Studebaker, Westinghouse, and The Western Union Company (NYSE/WU).

The DJIA reached its current 30 components in 1928. The 30 companies occasionally changed to adapt to the evolving market.

During the stock market crash of 1929, the DJIA lost nearly 90% of its peak value, and would not surpass that (inflation-adjusted) peak again until 1954.

The Dow first passed the 1,000 mark in November 1972; it crossed 10,000 for the first time on March 29, 1999. This growth trend would extend into the 1990s. At the turn of the millennium, the average began to level off near 10,500.

On October 9, 2007, the DJIA peaked at 14,165. This was followed by the 2008 financial crisis. On March 9, 2009, the Dow Jones index hit bottom at 6,547, or 55% below its October 2007 high.

After March 9, 2009, the Dow Jones began another bull run after investors, for better or for worse, accepted that the Federal Government and Quantitative Easing had stopped another Great Depression.

Since May 26, 1896, the Dow Jones list of companies has been reconfigured 49 times. Most recently, Kraft Foods Group, Inc. (NASDAQ/KRFT) was removed from the list in favor of UnitedHealth Group Incorporated (NYSE/UNH).

A broader index than the name implies, the most recent configuration of the DJIA includes: Bank of America Corporation (NYSE/BAC), Caterpillar Inc. (NYSE/CAT), E.I. du Pont de Nemours and Company (NYSE/DD), Exxon Mobile Corporation (NYSE/XOM), JPMorgan Chase & Co. (NYSE/JPM), International Business Machines Corporation (NYSE/IBM), Microsoft Corporation (NASDAQ/MSFT), The Procter & Gamble Company (NYSE/PG), Wal-Mart Stores, Inc. (NYSE/WMT), and The Walt Disney Company (NYSE/DIS).

There are several ways in which investors can trade the bull and bear markets on the DJIA. Several equities are designed to trade at par with or on the inverse of the DJIA. Investors can also purchase futures and options through the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE).

The Only Thing I Can Find to “Buy Low” These Days

By for Profit Confidential

The Second Half of 2014 What It Looks Like for GoldThe tally as of this morning:

The stock market is up 2.4% so far in 2014 as measured by the Dow Jones Industrial Average, while gold bullion is up 8.1% for the year.

“As an investor, do I get into gold or stocks at this point in the year?”

Well, if you’ve been reading my articles for a while, you know I’m not a fan of stocks right now. I simply believe the stock market has become a Federal Reserve–induced bubble.

And while there has been a lot written about price manipulation in the gold market, and while mighty Goldman Sachs still says the metal is headed lower in price, investors should look at gold bullion right now…that’s both old gold investors (so they can average down their cost) and new gold investors taking their first position.

Here are my reasons why…

In 2013, the Indian central bank and government imposed tariffs and restrictions on the importation of gold bullion into India, as they believed the demand for gold bullion in the country was hurting its national accounts. In the first quarter of this year, India started to ease its gold importation restrictions, and bang, last month, gold bullion imports into the country increased by 65% over June of last year. (Source: Bloomberg, July 16, 2014.) Demand for gold bullion in China, which I’ve documented in these pages, is also very strong.

Inflation, what gold bullion acts as a hedge against, is starting to gain momentum. The Producer Price Index (which tracks changes in the prices producers pay) increased by 0.4% in June from the previous month; that’s an annualized … Read More

How Many Warnings Can You Give?

By for Profit Confidential

Why Stocks Will Not End 2014 WellI’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:

The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.

Insiders at public companies are selling stocks (in the companies they work for) at a record pace.

The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).

The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).

Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).

The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.

The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)

And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”

How many warnings can you give investors?

Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More

What’s Up Three Times More Than Stocks So Far This Year?

By for Profit Confidential

Where Gold Will Trade in the Second Half of 2014Investors who bought gold bullion in early 2014 know it was a great decision. The precious metal has increased 10.2% in price between January and June, while the Dow Jones Industrial Average climbed by just three percent.

So far, so good—and as expected.

Going forward, it will not be surprising to me to see the precious metal outperform the stock market in the second half of the year as well.

Why will this happen?

As demand for gold bullion continues to rise and as supply declines (the exact situation we have today), gold bullion prices will have no option but to rise.

In the table below, I have plotted the production of gold bullion at U.S. mines for the first three months of the year compared to the first three months of 2013. Production at U.S. gold mines is declining month after month.

Production at U.S. Gold Mines, 1Q2013 vs. 1Q2014

Month 2013 Output (in Kg) 2014 Output (in Kg) % Change Year-over-Year
January 18600 18,500 -0.54%
February 17,300 17,100 -1.16%
March 18,700 18,200 -2.67%
Total 54,600 53,800 -1.47%

Data source: U.S. Geological Survey web site, last accessed July 1, 2014

While the chart above only details U.S. gold mining production, gold bullion production across the global economy is declining. Last year, as the yellow metal witnessed a massive sell-off in price, gold mining companies cut back on their exploration and capital expenditures budgets. This is now catching up and derailing production. And I see the situation for supply only getting worse.

Meanwhile, demand for gold bullion keeps rising.

We continue to see significant demand for the precious metal—and not … Read More

This Is Odd…

By for Profit Confidential

Demand for Stocks Outweighs Supply at This PointOne of the oddest things to happen with the stock market since it has recovered is that the number of shares trading hands each day has slowly disappeared.

In the table that I have created for you below, I list the trading volume for the S&P 500 for each June since 2009 and the percentage change in volume from the previous June.

Trading volume on the S&P 500 has dropped 60% since 2009!

Trading Volume, S&P 500, June of Each Year, 2009 – 2014

Year Volume (Shares Traded Per Month) Year-Over-Year % Change
June 2009 93,147,496,448
June 2010 91,971,043,328 -1.3%
June 2011 63,674,499,072 -30.8%
June 2012 59,703,365,632 -6.2%
June 2013 51,560,980,480 -13.6%
June 2014 38,765,629,440 -24.8%

Data source: www.StockCharts.com, last accessed July 1, 2014

What’s happening here? How can the stock market rise year after year if trading volume is down?

It’s very simple, but I’ll explain this new phenomenon in a moment. First, look at the chart of the S&P 500 below. Pay close attention to the volume at the bottom of the chart. As volume on the S&P 500 collapsed, the price of the index rose.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Volume is collapsing because the number of shares companies have outstanding is being reduced at an accelerated rate. For example, in the first quarter of 2014, S&P 500 companies purchased $154.5 billion worth of their shares back (stock buyback programs). Over the trailing 12 months, S&P 500 companies purchased more than half-a-trillion-dollars worth of their own shares—$535.2 billion to be exact. (Source: FactSet, June 18, 2014.)

Add to the shrinking number of shares outstanding the fact that central … Read More

Guess Who Is Pushing the Stock Market Higher Now

By for Profit Confidential

So That's Why Stocks Have Been Moving Higher…When I look at the stock market, I ask who in their right mind would buy stocks?

While key stock market indices creep higher, the fundamentals suggest the complete opposite. But despite valuations being stretched, insiders selling, corporate revenue growth being non-existent, and the U.S. economy contracting in the first quarter of this year, the S&P 500 is up seven percent since the beginning of 2014, the Dow Jones Industrial Average is getting closer to the 17,000 level, and the NASDAQ is back above 4,000.

As I have written before, a company can buy back its stock to prop up per-share earnings or cut expenses to improve the bottom line, but if revenue isn’t growing, there is a problem. In the first quarter of 2014, only 54% of S&P 500 companies were able to grow their revenue. (Source: FactSet, June 13, 2014.)

Going forward, things aren’t looking bright either. For the second quarter of 2014, 82 S&P 500 companies have already provided negative guidance for their corporate earnings. I expect this number to climb higher.

And consumer spending, the driver of the U.S. economy, is very weak, as evidenced by negative gross domestic product (GDP) in the U.S. economy in the first quarter of this year.

So if the overall environment is negative for the equities, who is buying stocks and pushing the stock market higher?

The answer (something I suspected some time ago): central banks are buying stocks.

A study done by the Official Monetary and Financial Institution Forum (OMFIF) called Global Public Investors 2014, states that central banks and public institutions around the world have gotten involved … Read More

« Older Entries

The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

In fact, we are predicting this crash will be even more devastating than the 1929 crash…

…the ramifications of which will hit the economy and Americans deeper than anything we’ve ever seen.

Our 27-year-old research firm feels so strongly about this, we’ve just produced a video to warn investors called, “The Great Crash of 2014.”

In case you are not familiar with our research work on the stock market:

In late 2001, in the aftermath of 9/11, we told our clients to buy small-cap stocks. They rose about 100% after we made that call.

We were one of the first major advisors to turn bullish on gold.

Throughout 2002, we urged our readers to buy gold stocks; many of which doubled and even tripled in price.

In November of 2007, we started begging our customers to get out of the stock market. Shortly afterwards, it was widely recognized that October 2007 was the top for stocks.

We correctly predicted the crash in the stock market of 2008 and early 2009.

And in March of 2009, we started telling our readers to jump into small caps. The Russell 2000 gained about 175% from when we made that call in 2009 to today.

Many investors will find our next prediction hard to believe until they see all the proof we have to back it up.

Even if you don’t own stocks, what’s about to happen will affect you!

I urge you to be among the first to get our next major prediction.
See it here now in this just-released alarming video.

This is an entirely free service. No credit card required.

We hate spam as much as you do.
Check out our privacy policy.