Dow Jones: the leader

I am trying to read the footprints of the market by looking at some market indices.

Index comparison


Since the significant bottom of 3-9-09, Dow Jones Industrial Average (Dow 30) has been outperformed by S&P 500 (SPX), Nasdaq 100 (NDX), Nasdaq Composite (COMPQ) and Russell (RUT, the Russell 2000, small cap) indices respectively.

Since the bottom of 11-2-09, things have changed. Dow is outperforming all these indices and guess who is under performing? The Russell 2000 small cap index. What does that mean?

Lets look at the daily three month charts of Dow, S&P 500, Nasdaq and Russell 2000 (below).

In a typical Bull market, the leadership does change from time to time. At the very bottom of Bear markets, Blue chips (large caps) are favored as they are the traditional strong companies with strong books and cash reserves. As the Bull phase sets in, the downtrodden or high Beta (high volatility, speculative) stocks gets favored. Since they will go up the most in percentage terms, money is thrown into those. Thereafter the rally matures. Investors start to feel jittery and become skeptical of the rally and large gain in prices. The want to protect their profit. So they move back into the Blue Chips.

Looking at the charts of these indices for last three months, it is clear that now Dow 30 is out performing the other indices. Look at the higher highs in Dow and lower highs in others. Does that mean that this signals the Bull trend is mature?

Sure it does.

Look for the relative preforming of these indices in the coming weeks. Things may be gearing for a change. We shall see.

With that, I am all ready to dive into a fun filled Thanksgiving!

Enjoy!