Dow reaches new high while other indices trail
If you pay attention to financial news, you’re already aware that the Dow Jones Industrial Average soared to a new high this week. While that is certainly noteworthy, it is important to keep it in perspective the the context of the overall markets.
The Dow is composed of 30 stocks. Historically, these have been some of the biggest American companies–the bluest of blue chips. These are the stocks investors and traders turn to when they have some uncertainty about the stock market. And this is the index that is doing best right now.
Most of the Dow stocks trade on the New York Stock Exchange (NYSE). There are more than 2,000 NYSE stocks, so the Dow represents just a fraction of those. However, NYSE stocks are generally considered more traditional and solid than those that trade on other exchanges.
The chart below shows year-to-date performance for the NYSE (black line) compared to the Nasdaq. Notice that not only have these indices not reached new all-time highs, they are still each below their highs of earlier this year. In the case of the Nasdaq, it is still about 5% below the high it achieved in April.
Some analysts use a comparison between these two exchanges to help determine optimum periods for market investment. Nasdaq stocks are generally smaller companies, often with a technical emphasis. The reasoning is that when the Nasdaq is advancing faster than the NYSE, it is a sign that investors are confident about the economy. There is some pretty compelling historical evidence that this reasoning has real merit.
For most of this year, the NYSE has held the dominant position in this comparison. That changed about six weeks ago. Since then the Nasdaq has advanced about 10% while the NYSE has moved up just 4%. Combined with the other technical and fundamental factors we’ve detailed in recent weeks, this is one more reason to have hope for a significant rally between now and the end of the year.
So while the Dow is the first index to set a new high this year, we hope others will follow in the days ahead.
F.S.
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