The Dow Jones Industrial Average, or Dow Jones, is a weighted index representing the stock price action of 30 of the largest U.S. corporations. It is the world’s most widely followed stock market index. The Dow Jones Industrial Average was created on May 26, 1896 and is named after Charles Dow and Edward Jones. The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the Dow Jones Industrial Average 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.
This market is definitely looking tired after such a strong run since mid-October.
The performance of transportation stocks has been noticeable this year. The Dow Jones Transportation Average has actually outperformed the NASDAQ Composite year-to-date. In my mind, when there’s leadership from this group, it’s a compelling, traditional bull market indicator. Countless component companies are pushing record highs.
Equally as impressive is the performance of the Russell 2000 index, which has pretty much mimicked the NASDAQ Composite over the last two years.
A divergence became apparent in the beginning of July, as the Dow Jones Industrial Average began underperforming the other indices. It’s as if investors upped their risk tolerance, willing to bet on more risky equity assets as they felt more comfortable being bullish on a stock market that’s already gone up.
Over the last 12 months, the Dow Jones Transportation Average has been the leading index (excluding biotechnology stocks, which aren’t comparable). While outperforming the Russell 2000 by a slim margin and the Dow Jones Industrial quite significantly, I think the Dow Jones Transportation Average remains the leading index going into 2014 and a great indicator for the broader market.
Among the railroad stocks that are included in the Dow Jones Transportation Average, Union Pacific Corporation (UNP) bounced back nicely higher over the last five weeks after experiencing a lasting price consolidation the past six months. It will be interesting to see if the stock can hold above its all-time record-high of $165.18. Doing so will be meaningful.
CSX Corporation (CSX) is also a component of the Dow Jones Transportation Average, and it, too, seems to have broken … Read More
This market has been due for a major correction for quite some time. The marketplace expected it (including myself), but what we got instead was share price consolidation with continued leadership from blue chips and small-caps.
Countless stock market indices are right close to their highs, including the S&P 500, Dow Jones Industrial Average, and Dow Jones Transportation Average. There’s also the Russell 2000 Index of small-cap stocks, which has performed exceptionally well throughout this year. Finally, the NASDAQ Biotechnology Index continues to be a powerhouse wealth creator, having doubled in value over the last two years.
All this in an environment of satisfactory earnings but very little in the way of top-line growth. While the stock market has every reason to pull back significantly, fighting the Fed has proven to be unprofitable in equities. The opportunity cost of not being in the stock market since the financial crisis has been significant.
The monetary reflation has seemingly worked for the stock market so far, but it’s very clear that corporations remain unwilling to make major new investments, which would go a long way in helping the Main Street economy. Instead, they are keeping shareholders happy by returning their excess cash in the form of dividends and paying for those dividends with share buybacks. (See “If You’re Looking for Rising Dividend Income…”)
Given current information, I see no reason why prevailing conditions in capital markets might change significantly near-term. With funds continuing to flow into equities, the stock market needs a catalyst to effect a major retrenchment in share prices.
Balance sheets among many large U.S. corporations continue to … Read More
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