If you think this year’s been an unusually bullish one for the Dow Jones Industrial Average (not to mention the other key market indices, like the S&P 500 or the Nasdaq Composite), well, you’re half right. While this year’s advance is above the long-term norm, as amazing as it is we’ve gone this long without a major interruption, this year’s actually not been unusual in terms of how far we’ve come on a net basis.
On the other hand, we’re certainly pushing the envelope. The good news is, that envelope really starts to widen up from here.
Of course, with earnings season right around the corner — and with several of the individual Dow Jones stock names overextended, you can’t afford to turn your back on the market for a single minute here.
First things first though.
Dow Jones Stock Within Sight of Record
Though the S&P 500 and the Nasdaq Composite both bumped into record highs on Friday of last week, the Dow Jones Industrial Average hasn’t quite done the same yet. It’s close though, and perhaps more interestingly we’re seeing the Dow make a nice bowl-shaped upward curl out of the pullback from two weeks ago. These slow-moving U-shaped turns tend to last longer than the breakout thrusts that begin as simple spikes.
It’s still a pretty unusual move though. We’re playing with fire. The Dow Jones Index has now advanced for 47 weeks without a correction of more than 4%. As a result, it has put a little distance between itself and its long-term averages. For instance, the Dow Jones today is 6.6% above its 200-day moving average line, which is about the maximum degree of separation that can be sustained.
It can be sustained though. That’s more or less where it’s been able to find a balance since April, maintaining the happy medium between “too much” and “too little.” The slow pace of progress is the best thing the Dow Jones Industrial Average has going for it right now.
It’s not all good news though.
While the Dow Jones stock index may have room to rise and the momentum it needs to keep doing so, earnings haven’t quite kept up with the index’s progress. The DJIA is now trading at a trailing P/E of 20.6, and a forward-looking P/E of 20.3; both are above long-term norms. One could argue the potential for a tax code overhaul against a backdrop of low-interest rates justifies higher premiums right now. One could also argue, though, that these factors are also already priced into the Dow, leaving little to no further room for more upside.
To really get a grip on where the index is likely to move next, however, one has to understand which of the Dow Jones stock components have led the charge, and which have held it back.
Dow Jones Industrial Average Components
The chart below is more than a little bit eye-opening. Plotting the performance of each of the 30 Dow components since the end of last year, we learn that Boeing Co (NYSE:BA), of all things, has led the charge. Running a distant second is Caterpillar Inc. (NYSE:CAT), with its 38% year-to-date gain.
At the other end of the spectrum is General Electric Company (NYSE:GE), with its 22% loss, with the 10% loss so far logged by International Business Machines Corp. (NYSE:IBM) also acting as deadweight.
It’s a strike against the Dow’s future bullishness, as neither the leaders nor the laggards are in a particularly good position to move higher in the foreseeable future.
There are some names in the middle of the pack that look like they’re trying to accelerate. American Express Company (NYSE:AXP) and Intel Corporation (NASDAQ:INTC) are heating up, for instance. They can’t do it alone though.
Looking Ahead
Calling a spade a spade, while the momentum has certainly been trade-worthy, it will end sometime; not even lowered tax rates can tack on a ton more gains here, and that’s assuming President Trump’s proposal is approved. There’s no assurance it will get all the bipartisan support it needs.
On the flipside, if you think the Dow Jones stock index simply can’t move any higher than it has so far this year, think again.
The graphic below speaks for itself. While the Dow Jones Industrial Average is above its normal year-to-date pace, when taking out the years in which the Dow booked a loss, this year’s gain is actually quite normal compared to the average … slightly below average for a bullish year, in fact.
The play? What makes the current situation so unnerving isn’t the scope of the gain, which really isn’t that big. It’s pretty typical. And, while valuation is a modest concern, it’s not a glaring concern. Stocks should be cheaper, but they’ve rallied while more expensive.
On the decidedly bullish end of the spectrum is the fact that we’re now starting the fourth quarter, which is almost always bullish. There are also enough potentially bullish Dow components to offset the pullbacks Boeing and Caterpillar may dish out from here.
On balance, the trend is bullish with room to grow, even if it feels like that shouldn’t be possible. It’s going to take something very specific to serve as a pointed catalyst to tip this market over, and that catalyst just isn’t on the horizon, or even the radar.
Q3’s earnings and any Q4 earnings warnings will be the most likely prod for a pullback. Until the Dow breaks under 21,490 and/or the 200-day moving average line currently at 21,017 though, there’s still not a tremendous call for worry.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
