Dow Jones Industrial Average (.DJI) Still Worth Following?

Dow Jones Industrial Average (.DJI) Still Worth Following?

Dow Jones Industrial Average (.DJI) Still Worth Following?

The Dow Jones Industrial Average (DJINDICES: ^DJI) is one of the world’s most followed stock market indexes. With a history that dates back to the 19th century, the venerable market benchmark has played a vital role in the general public’s understanding of how the stock market works.

Many have criticized the Dow over the years for not being reflective of the makeup of the broader stock market. It’s true that the Dow’s methodology differs from most other measures of stock market performance, but there are ways in which the benchmark has gotten more representative of the largest stocks in the market than it was in the past.

The quirks of the Dow

As its full name states, the Dow is an average. Even today, calculating the Dow is relatively simple. All you have to do is add up all the share prices of the 30 component stocks and then divide the result by a specific number known as the Dow divisor. When the Dow was first created, the Dow divisor was simply the number of stocks in the average. Over time, when stocks split their shares, the divisor was changed to ensure that you could still make valid comparisons across time periods.

That stands in contrast to the way most stock market benchmarks calculate their values. Indexes like the S&P 500 (SNPINDEX: ^GSPC) use a weighting system based on market capitalization. That system gives the largest weight to the biggest companies in the market.

The reason many prefer market capitalization over share price for determining weights is that share price is only one component of value. Under a market cap weighting system, if you have a stock with twice the shares outstanding at half the share price as another stock, both stocks will get the same weight. With a share price weighting system, though, the stock with the lower share price will only get half the weight of the higher-priced stock.

Why price weighting is less of a problem now

Historically, that’s led to some big disparities between the Dow and other indexes. Looking at the current makeup of the Dow, among the 30 stocks in the average, the top five get about 33% of the total weight of the benchmark. By contrast, the bottom five stocks make up less than 6% of the overall weighting of the Dow. That’s because the highest-priced stocks in the Dow have share prices above $300, while the lowest have prices below $50 per share.

Yet one way the situation has gotten better recently is in the makeup of the top stocks in the Dow. Among the five stocks with a weighting of 5% or more in the average, you’ll find aerospace giant Boeing in the industrial sector, Apple in technology, UnitedHealth Group in healthcare, Wall Street financial giant Goldman Sachs, and consumer home improvement retailer Home Depot. That group doesn’t include every sector of the stock market, but it does offer a level of diversification that hasn’t always been present for the Dow.

Indeed, many other commonly followed benchmarks do a poorer job of offering a broad-based picture of the market. The Nasdaq Composite, for instance, is designed to track the prices of stocks on the Nasdaq Stock Market. Yet because so many of the largest companies in the Nasdaq are in the technology sector, market commentators often use the Nasdaq Composite as a proxy for tech stocks rather than for the broader market.

Don’t ignore the Dow

The Dow Jones Industrial Average is the oldest measure of the U.S. stock market, and people across the globe watch it to see how stocks are performing. The benchmark does have its idiosyncrasies, but it hasn’t lost its relevance, and it’s still worth it for investors to follow how the Dow is doing.

Technical Indicators

Overall, the bias in prices is: Upwards.

Note: this chart shows extraordinary price action to the upside.

By the way, prices are vulnerable to a correction towards 28,164.65.

The projected upper bound is: 29,793.12.

The projected lower bound is: 28,977.29.

The projected closing price is: 29,385.21.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 8 white candles and 2 black candles for a net of 6 white candles. During the past 50 bars, there have been 32 white candles and 18 black candles for a net of 14 white candles.

Three white candles occurred in the last three days. Although these candles were not big enough to create three white soldiers, the steady upward pattern is bullish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 91.0557. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 3 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 72.62. This is where it usually tops. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 10 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 165.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 10 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 6 period(s) ago.

Rex Takasugi – TD Profile

DJ INDU AVERG closed up 50.459 at 29,348.100. Volume was 34% above average (neutral) and Bollinger Bands were 12% narrower than normal.

Open     High      Low     Close     Volume___
29,313.31129,373.61929,289.91029,348.100 336,871,200
Technical Outlook 
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 28,933.55 28,239.70 26,909.23
Volatility: 8 9 14
Volume: 275,842,048 250,643,920 263,172,144

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

DJ INDU AVERG is currently 9.1% above its 200-period moving average and is in an upward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect moderate flows of volume into .DJI (mildly bullish). Our trend forecasting oscillators are currently bullish on .DJI and have had this outlook for the last 25 periods. Our momentum oscillator is currently indicating that .DJI is currently in an overbought condition.

The following two tabs change content below.
HEFFX has become one of Asia’s leading financial services companies with interests in Publishing, Private Equity, Capital Markets, Mining, Retail, Transport and Agriculture that span every continent of the world. Our clearing partners have unprecedented experience in Equities, Options, Forex and Commodities brokering, banking, physical metals dealing, floor brokering and trading.

You must be logged in to post comments :  
CONNECT WITH