Put Down the Party Hats – Dow 17,000 is Dumb

Even the argument that it's psychologically important is rubbish

   
Put Down the Party Hats – Dow 17,000 is Dumb

A blowout June jobs report helped lift the Dow Jones Industrial Average above 17,000 for the first time in history Thursday, but unless you like wearing a baseball cap that says “Dow 17,000″ on it, this new blue-chip level doesn’t mean a thing.

Surely some pundits will say Dow 17,000 is psychologically significant because it will help bring mom-and-pop investors back into the market.

That’s rubbish. They said the same thing at Dow 14,000, Dow 15,000 and Dow 16,000, and Mom and Pop are still sitting on their rockers.

Retail investors — having been burned twice in 10 years — have wisely learned to dismiss much of this sort of hype. That’s one reason why CNBC’s viewership is back to where it was in 1997.

Besides, retail investors don’t move the market — mutual and institutional funds do — and they don’t care what the Dow Jones does. When it comes to U.S. equities, the only market benchmark they care about is the S&P 500. 

And as for the timing, Dow 17,000 really blew it, coming one day before a major holiday weekend. Trading has been running on vapors for years, as it is. With the big boys heading out to the Hamptons for an early start to the holiday, professional trading desks are thinly manned with junior-level employees.

They’re on tight leashes with only one order: Don’t screw up.

Why Dow 17,000 is Meaningless

But here’s the most important reason why Dow 17,000 is dumb. Even after notching that milestone, the blue-chip index has still been a major drag on performance this year.

As we just wrote, U.S. stocks are having a great year. Indeed, they’re rising well ahead of forecast. The S&P 500 is up 7% for the year-to-date. Back in January, that’s the price return the experts projected for the index for the entire year.

Indeed, through the first half of 2014, the S&P 500 was on track for an annualized gain of 12%.

The Dow Jones, meanwhile, has been an absolute dog. The latest action still puts it up less than 3% on a price basis for the year-to-date. And it’s lagging the S&P 500 by a wide enough margin to get most professional money managers fired. Just have a look at the chart:

Dow 17000 Put Down the Party Hats   Dow 17,000 is Dumb

It’s fun to watch the pundits get all breathless every time the Dow crosses one these levels — but it’s meaningless.

Psychologically, it has proven to be a nonstarter.

It has no technical implications either.

Heck, the Dow Jones Industrial Average doesn’t even represent anything that tells you much about the state of the economy or the market. As we’ve argued before, it’s time to ditch the Dow.

For one thing, the so-called industrial average is too constrained, comprised of only 30 stocks. It’s also poorly structured. Unlike almost every other index out there, is weighted by price rather than market capitalization.

That’s why when professional investors want to buy “the market,” they buy the SPDR S&P 500 ETF (SPY).

To give you an idea of relative importance, the SPY has an average trading volume of 91.5 million shares a day. The equivalent ETF for the Dow — the SPDR Dow Jones Industrial Average (DIA) — has an average daily volume of 4.7 million.

Bottom Line

There are plenty of reasons for fireworks and confetti this weekend.

Dow 17,000 ain’t one of them.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/07/dow-17000/.

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