Death to the Dow

[TBS]

Death to the Dow!

I hate the DJIA! To me, it is a completely crazy index. Member companies, rather than being included on some tangible and transparent methodology such as market capitalisation, are included basically because of who they are. Sure, they are all ‘big’ companies, household names producing products that many people use every day, even ‘us lot’ sitting under the guidance of ‘Wannabe President’ Tony! (As a trader, this doesn’t matter, all we are looking for is points, but as the worlds most quoted index?)

However, the madness doesn’t stop there – the weighting allocated to each member company is purely dependant on the physical dollar value of the stock. So, although 3M (MMM) ranks something like 34th in the SP500, it is 1st in the DJIA – and not just first by a bit, 11.31% (stock price c$123) versus it’s nearest rival Procter & Gamble (PG) at 7.35% (stock price c$80), some 50% ‘heavier’.

To arrive at the index figure, a ‘divisor’ is applied across the sum of the dollar values of the 30 stocks involved. If there are any changes to the stocks – such as the recent stock split in Microsoft (MSFT), then the factor applied is changed and applied to all stocks in the index so that it remains at parity with whatever the closing figure was the day before.

The current divisor as at 18 February is 0.14279922 for the DJIA. To make life a bit easier for you, here is an Excel Spreadsheet , which has all the companies and their current weightings. The data for the spreadsheet is pulled from Yahoo! – you will need Excel 2000 or better to use this facility.

The purpose of this article is to take a TA view on the DJIA as a whole to get some idea of where it may be heading by looking at the individual stocks, rather than purely the index itself.

DJIA

There still exists a huge potential head and shoulders pattern which hasn’t quite broken yet with a neckline c7500. Working form a high of c11500, this gives us a target of 3500 should the neckline be breached.

The main reason I personally have a ‘problem’ with the DJIA is that due to the strange manner in which the members are admitted – and the even stranger method by which the index price is calculated - the chart patterns are smoothed out by the weightings.

If we compare with the SP500:

Here we have a completed and very apparent head and shoulders pattern which has all the classic hall-marks of retests of support/resistance, something that is lacking in the DJIA chart.

3500 DJIA

So is it really possible that we are looking at a long-term target of 3500 for the DJIA – another 50%+ from where we are now? Here are the charts for the current 30 constituents, listed by epic code:

Alcoa

A massive double top comprising of a head and shoulders reversal – which didn’t make its target and a smaller double top which has broken, giving its own target of $11, the larger double top gives a target of something like $4 – frightening stuff for a stock that hit a high of c$45 two years ago. The base support from this chart is $8.00, so I will use that as my target for the moment.

American Express

The pattern is still forming in AXP, a potential H&S reversal with the neckline at 25. It must be stressed that the pattern has not yet formed, however, if it does complete then the indications are that dear old Amex is going out of business – sounds crazy? – probably, but if we are looking for the next bubble it is probably sitting in credit and credit cards. If the recession turns to depression, then these guys are in the frontline of loan defaults. For the purpose of this exercise, I’ll take a break of 25 and use the double top formed over the past year as the measuring pattern, giving a target of $7.

Boeing

This simply has the look of a company going out of business! For vanity’s sake I’ll give it a target of $5.

Citigroup

The potential for a H&S reversal exist here with the neckline at 25, coinciding with the current long-term bull (bull – what am I saying!!!!) trend. A break of the trend and pattern would certainly lead to a move to 15 and longer-term to the base support at $5

Caterpillar

Big swings, 30 to 60, this is the most promising chart so far, in that it is trading in a range – in fact right in the middle at the moment. For the sake of the exercise I’ll use the low end of the range at $30.

Du Pont

Already on its way down with a target of $25, major resistance at $50 and current support at $33.

 

[TBS]

Disney

Very ugly, another company that looks like it could face some real problems. If we do get to the depression scenario, then the luxury of Disney will be the first to suffer. I’ll use $5 for the sake of the exercise, although at 1.43% of the index, it could disappear and only have a 112 point affect in total.

Kodak

The target for the H&S reversal is $20 although there is major support at $25. Looks horrible!

General Electric

No particular pattern to use as a measure of any forward targets, other than support at c$20 holding at the moment (target for the H&S reversal completed). If we see another leg down, then the next level of good support is $10.

General Motors

Doesn’t look like car sales are going too well! No particularly discernable pattern to give a target trade, but the base support at $30 is looking under serious threat, if this goes I wouldn’t be surprised to see $20 in very short order.

Home Depot

The descending triangle break down gives the price action a target of $5 – ouch, looks like the redundancy money won’t be spent on home improvements then……….

Honeywell

Again looking ugly, another company that has the very real possibility of reaching a single figure stock figure. Take current base support at $15 for the purposes of the exercise.

Hewlett Packard

Currently neutral with major support at $10. Another ‘consumer tech’ stock that has got so low that they become cash traps as they meander along doing nothing.

IBM

Starting to look very ugly, huge distribution phase which has broken down and just retested the break point, a return to $50 looks to be on the cards, break of $90 to the upside and all bets are off.

Intel

Scrabbling around the lows already, a break of $15 and $7 looks favourite.

International Paper

Generally stuck, but a break of the potential H&S forming over the last couple of years will give a target of $20

 

[TBS]

Johnson & Johnson

Still retaining a long-term bull trend, which is more than can be said for most stocks at the moment, JNJ has good support at $50 and then $40. Rather than seeing a complete meltdown in JNJ I would expect a move to neutral and a retest of $40. If $35 goes then a swift move to the $15/$20 area looks likely.

JP Morgan Chase

As onre of the ‘bastions’ of the financial world (I think I spelt that correctly J), JPM is basically a geared play against the market. If the Dow breaks down again, this should drop further. Major resistance at $25/$30, if we get another leg down, then the target will be c$10.

Coca-Cola

There have been enough headlines about ‘Coca-Cola going flat, bubbles bursting etc…’ without me adding more, but the current break to the downside is yet another extension of the current bear trend. Even taking just the immediate price action, the price has a target of $22.

McDonalds

Very, very ugly. Like DIS reliant on spare cash in the pocket and the ‘leisure dollar’, MCD is probably more susceptible to major economic failure than most, target form the big H&S reversal/ triangle pattern - $4.

3M

As mentioned earlier on. This is the ‘biggest’ stock in the index at the moment – some 11+% of the index and has held up remarkably well in the current market conditions. If there is a sniff of company problems, pension holes, dodgy accounting, this could really bring the house down – big style. However, the support at $120 is holding for the moment, a break here and the immediate target is the next support at $110, followed by the psychological $100 level. For the purposes of this exercise I’ll use the $100 level.

To mute the effect of this company, perhaps a share split should be on the cards.

Altria Group

Philip Morris as was. Tobacco firms are constantly under attack, reduction in advertising, the threat of major class torts (I’ve just finished ‘The King of Torts’ by John Grisham – excellent read). In a world of mass unemployment and mass litigation they could come under even more pressure, $35 is holding for the moment, if we get the next downward move, then a charge to the 2000 lows at $20 is probable.

Merk

MRK is looking rough as well, the break of $60 opened the doors to a swift move down to $40. This has now retested the $60 level and is looking susceptible to further falls, target $25.

Microsoft

MSFT sparked the recent change in the Dow ‘divisor’ with its share split. It still looks like a bear, although there is huge support around the $20 level. The next leg down should see MSFT trading around the $15 level.

Proctor & Gamble

As with JNJ, PG is holding on to its long term bull trend, however the stall at 495 is staring to look ominous and a break of $75 gives a target of $55. – If $55 support goes……….

SBC Comms

A massive H&S reversal gives SBC a target of $14 – getting there, psychological support at $20 holding for the moment, but for how long?

 

[TBS]

AT & T

Looks horrible, if we see another breakdown and the current $17 support is broken, then the next stop is psychological at $10.

United Technologies

There is the potential of a big dump in this stock, the c$50 levels have held so far, and may continue to do so, but if they are broken, then $15 is the target.

Wal-Mart

Probably the steadiest chart in the Dow, stuck in a $60-$40 range. In times of trouble these guys could actually do reasonably well with a stack ‘em high, sell ‘em cheap approach to mass retailing. A break of $40 is a big threat to the share price, but I’ll use $40 as a figure for this exercise.

Exxon

The final stock to be reviewed – an oil company, anything could happen. There appears to be so many arguments about the direction of the oil price and the affect on the oil companies that they are a bit of a lottery. However, the chart shows us a bear trend and a set of descending triangles with a target of $26.

Summary

A long post, apologies – at least it wasn’t the SP500! Looking through the charts I would make the following targets for the stocks, should we see the next leg down, a break of c7500 on the overall index:

AA 		$8			IP		$20
AXP 		$7			JNJ		$40
BA		$5			JPM		$10
C		$5			KO		$22
CAT		$30			MCD		$4
DD		$25			MMM		$100
DIS		$5			MO		$20
EK		$20			MRK		$25
GE		$10			MSFT		$15
GM		$20			PG		$55
HD		$5			SBC		$14
HON		$15			T		$10
HPQ		$10			UTX		$15
IBM		$50			WMT		$40
INTC		$7			XOM		$26

Putting these numbers into a spreadsheet – which you can download here:

Excel Spreadsheet

Gives us a synthetic Dow target of 4468, still something like 1000 points away from the target of 3500 offered by the overall Dow chart. However, what is particularly alarming is the potential weightings at this level.

MMM		15.67%
PG		8.62%
IBM		7.84%
JNJ		6.27%
WMT		6.27%

At nearly 16% MMM ‘is’ the Dow worth some 700 points, this surely is an unacceptable situation – similar to the furore over VOD when it was 15% of the FTSE100. If I were the head honcho at MMM I would be both proud and deeply concerned. Proud that my company was doing damn well given the overall market conditions, and is currently the ‘flagship’ of the Dow. Concerned that this profile is becoming too high, with the potential to become higher, making my company both a major target and scapegoat should things continue to deteriorate.

So, my exercise didn’t completely back-up the overall chart target – no problem, that is why it was worth doing. However, such is the oddity that is the DJIA, undoubtedly the worlds most famous market but also the most vulnerable due to the strange way in which it is calculated. For a reality check I still prefer the SP500, Dow is cloud-cuckoo-land and the gap between the reality of the markets and the surrealism of the Dow is widening. One of the indices is going to have to play catch-up, my money is on the Dow joining the SP rather than the SP rallying to the Dow.

 

[RogerM]

Another great post TBS - no need to aplologise for its length - and I know that it takes a long time to put together a post like this. I'm sure other board members will join with me in offering thanks for a thoughtprovoking piece of analysis. It's good to see that the composite of the individual pieces of analysis backs up the bearish view of the DJIA chart.

Looking forward to the analysis of the Russell 3000!

 

[TBS]

Looking forward to the analysis of the Russell 3000!

Thanks Roger, yes they do take a bit of time! - 3000 - yeah, right........

 

[orchard]

As a novice TBS - may I thank you for this post. I has helped my understanding of charts and the DOW no end.

Many thanks.

 

[bansir]

Thanks TBS, for sharing your analysis.

There's always so much glib referal to 'trading the Dow'. I guess it really is essential to have a handle on the nature of the index before we trade it.

Cheers,
Neil

 

[bansir]

mind you, the dramatic title of the post was the hook for me!

Neil

 

[2am]

A fascinating analysis TBS, thank you .. and likely to keep me up exploring it until 2am tonight, 2am tomorrow and even longer!!

2am
===

 

[twiggytwo]

An absolute treat TBS, has really opened my eyes to why I also find the DOW so weird. Keep up the good work!

 

[Scooby]

Thanks TBS for sharing your thoughts very interesting. I enjoyed your summary for each stock and the bigger outlook.