There are many ways to gauge the strength or weakness of the U.S. Stock Market. For us, there isn’t a single “best way” to do it. The advantage we have is that we just analyze all of them. There are over 50 charts in my U.S. Stock Market Indexes workbook alone.
But today I want to focus on an interesting chart that I don’t think gets the credit it deserves: The Dow Jones Composite Index. I really like how it represents all of the stocks in the 3 major Dow Jones Indexes: Industrials, Transportation and Utilities. If you want a broad measure of the most important stocks in America, I think this is it.
There are 30 stocks in the Dow Jones Industrial Average, 20 in the Dow Jones Transportation Average and 15 in the Dow Jones Utility Average. These 65 stocks represent the Composite.
We want to ask ourselves, in which direction is this index heading?
For me, it’s right in the middle of a sideways range over the past 2 years. This range goes from about 7350 to 8600:
We don’t always have to be in an uptrend. Look at 2014- to 2016. Why can’t we be in one of those? And stuck below resistance since late 2017 around 8600?
Who is to say that we don’t retest those lows? Do we have to? I think no, but it is certainly possible.
We’ve seen a nice mean reversion, or perhaps just the first half of one. I think this chart above represents the current market environment well. Can you handle it? Or are you better off with higher cash holdings. Are you one of those people who believes the market owes you something?
I think it’s important to take a step back and ask yourself who you are. Why are you here? Are you responsible for yourself, for others? Or both? What is your time horizon? What sort of risk tolerance are you prepared for?
The first thing we all need to do is answer each of those questions. They will be different for all of us. Then we can approach the market with specific intentions, instead of just at random.
Right now the US Stock Market is in a massive range, at best. I think there is a lot of overhead supply near that 8600 level that we need to be aware of. I look through a lot of charts. I think this index is a good representation of the current market. Some stocks are mean reverting, some already did, and others are still lollygagging. I think it’s best to identify specific situations among individual stocks rather than guessing the next direction of the S&P500 or Nasdaq. I’m not sure that it’s the best time for that right now. I prefer the names themselves.
Tell me what you think