Dow Industrials Still Can Tell the Tale of the Tape

By Chris Dieterich
Jan 25, 2017 9:56 am ET

The truth is that the blue chips matter little for professional money managers these days. But 120 years after its creation, the widely watched benchmark still does a good job explaining what’s happening in the U.S. stock market. And it’s still the measure of the market that many retail investors use, experts say.

Other market barometers, namely the S&P 500, have become more ensconced on Wall Street over the years. Market prognosticators almost always set their predictions in terms of the S&P 500, for instance, and fund managers seldom measure their performance against the Dow, a concentrated blend of just 30 stocks.

Stride For Stride

The correlation between the Dow and the S&P 500 over rolling 30-day periods has averaged 0.94 over the past 20 years, according to WSJ Market Data Group. That’s a very close match for a measure that runs between 1 to -1, where 1 means perfect unison and -1 means perfect opposition.

Some pros say they can can divine useful observations from the Dow. John Kosar, director of research at Asbury Research, a technical analysis firm in Schaumburg, Ill., observed last year that the Dow Industrials darted higher before many other indexes, prompting him to slap a bullish 20400 target on the blue chips in April 2016.

“Is the Dow the first benchmark I look at? No,” Mr. Kosar said “It’s more emblematic of the market to retail or casual investors. It’s a brand name, like Chevrolet.”

He was watching for a Dow move much higher than 20000 to indicate that it could be nearing time to prune gains and last week closed his bullish call on benchmark.

“All the people on financial television will put on hats and pop corks,” Mr. Kosar said. “For mom and pop that have their money in IRAs it’s like somebody waving a flag in front of a bull – they can see it, and people talk about it around the water cooler.”

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