Why Many Stocks Are Down as S&P 500 Rallies

Many Dow stocks are lagging. These are their stories.

It’s like Law and Order, SVI (special victorious investments). The headlines blare with news of the largest bear market rally in stock market history. And in many ways, it is. However, that is the past.

You see, the S&P 500 is the index that has become “the market” to most people. But it is essentially a duopoly, with the Dow Jones Industrial Average (DJIA) also thought of as a market gauge. I have written in the past about how this DJIA/S&P 500 relationship will ebb and flow.

However, for most of modern investment history, they have performed similarly. This has been the case, despite the fact that the DJIA has only 30 stocks, not 500.

I see weird markets

To me, this has always made analyzing the components of the Dow a very efficient way of getting a sense of the broader stock market. And, when I look at it today, I see something that I typically see in frothy, vulnerable stock markets.

What do I see? That despite the record run up in the S&P 500 and the DJIA from March’s panic low levels, most Dow stocks are still down this year.

Rare finds

Specifically, through close of business Thursday, ( August 13, 2020), only 10 of the 30 Dow stocks were up for the year. 10! Three of those (Apple AAPL -0.3%, Microsoft MSFT +0.5%, Home Depot HD +2.5%) were up 29% or more. Walmart WMT +2.4%, United Healthcare and Proctor & Gamble PG +0.2% were up between 9-11% each. A few more DJIA component stocks were up a handful of percentage points.

The other 20 out of 30 stocks? Down for the year. In fact, 9 of them are down at least 18% for the year.

Where does this lead us?

The performance of 30 major industrial businesses is certainly not a complete picture of today’s stock market. And, if you have been following along this year, you know that tech stocks have been the main story. The stock market would be pretty weak without them.

Based on my analysis of the Dow and other stocks, as well as about 100 ETFs I track to size up global markets, here’s my take. I see potential for some of the non-tech sectors to catch up further to the mighty tech sector. It is already starting to happen.

However, this is not some signal that a new bull market is starting. Hardly. Instead, as was the case about 20 years ago, the broad market indexes may edge a bit higher, as the rest of the gang gets their chance to cut some of those 2020 losses.

But after that happens? Perhaps reality sets in. The market moves from a fingers-crossed, Fed-liquidity-induced rally to a gradual erosion of the complacency and confidence that exists in some corners today.

So, is there near-term, tactical opportunity in parts of the U.S. stock market? Yes. Because there always is, and always will be. However, I urge you to separate these tactical opportunities from the increasing risk of proceeding blindly with “long-term investing” methods that are so prevalent today.

The Dow is sending a signal. Let’s listen to it.

Related: If This Is A Dot-Com Bubble Repeat, What’s Next For The S&P 500?