The Dow Jones Industrial Average is, in my experience, the most important index in the stock market.
I understand many Americans, myself included, have benefited from all the success of the Nasdaq, filled with giant American tech companies. I get that.
As someone who’s been in this business for more than 22 years, I recognize that many of the financial institutions, like hedge funds and other asset managers, are benchmarked to the S&P 500.
That means get paid based on how they do compared to the S&P 500, making the SPX the most important.
I am aware of all of those things.
And I continue to argue that the Dow Jones Industrial Average is Numero Uno.
Don’t Fight Papa Dow
One of my early mentors, Ralph Acampora, used to shout, “Don’t fight Papa Dow!”
He still does, actually.
You can find him outside Minneapolis, where he painted the world’s largest chart of the Dow along the side of his barn:
I can still hear him, and see him waving his finger, telling me not to fight Papa Dow.
Do you know what I used to do a lot when I was younger? I used to fight Papa Dow.
I thought I was so cool, in my early 20s, claiming to anyone who would listen that the Dow was played out. The S&P 500 was in charge, and anyone who still looked at the Dow was getting left behind.
What a fool I was!
It took until I was in my 30s for me to finally realize the importance of the Dow. I’d already been in the business for a decade.
And now I know.
Here’s what it looks like on shorter time frames, pushing up against this resistance since the fourth quarter of 2024:
People tell me the market is stretched and all this winning is unsustainable.
But then I look at the Dow not making any new highs yet this year, and it points to the exact opposite.
We haven’t even gotten going yet.
The Dow Is More Diversified
One of the things you often hear is the Dow has only 30 stocks.
How can the Dow be more diversified than the Nasdaq-100, which has three times as many stocks, or the S&P 500, which has more than 16 times as many components?
Well, let’s take a look at the weightings.
More than 50% of the Nasdaq-100 is Technology alone. There are no Financials in the Nasdaq. No Energy. No Materials. And hardly any Industrials.
How is that “the Market”?
The S&P 500 isn’t as egregious, but still it maintains a 34% weighting in Tech, while Industrials are only 7%.
The Dow isn’t perfect, but it’s simple, and it’s much more diversified, with only a 20% weighting in Techn. It also has a 13% weighting in Industrials and 13% Consumer Discretionary.
The Dow also has twice the exposure to Financials as the S&P 500. And the Nasdaq has no exposure to Financials.
I argue Financials are the most important sector. We don’t have bull markets without Financials. That’s especially true when you look outside the United States.
That the Dow carries two times the Financials weighting vs the S&P 500, almost twice the exposure to Industrials, and nearly half the Tech weighting, balances it out much more.
Weight of the Evidence
Think about it: If you’re going to do a sum-of-the-parts analysis of the market, you have the option to go through 30 companies. Or you can go through 500 companies.
That’s up to you.
The conclusion will be the same. And the results will also be the same.
If the S&P 500 is doing well, so is the Dow. And vice versa.
In fact, if I didn’t color-code this chart, separating the S&P 500 and the Dow, you wouldn’t be able to tell which is which.
This chart goes back to the late 1950s when the S&P 500 debuted, well over half a decade after the Dow:
“If you ain’t first, you’re last” is how the great Ricky Bobby put it.
And it’s certainly true here when discussing the Dow vs the S&P 500.
Everybody’s Wrong Again
When you follow markets for as long as I have, you’ll start to realize how often everybody’s wrong.
Just because they’re older than you doesn’t make them right.
Just because they might be more experienced than you doesn’t make them right.
Just because they have more money than you doesn’t make them right.
Do the work. You’ll see.
I had to learn this lesson the hard way.
Trust yourself. But to be confident in your own work, you actually have to do the work.
Or at least sit alongside someone you know is putting in the time.
That’s where we come in.
Let’s start right here…
Here’s a longer-term look at the Dow:
Notice how former resistance from late 2021, early 2022 turned into support this Spring.
This is Supply and Demand 101.
I think a breakout here in the Dow Jones Industrial Average can spark the next leg higher for this market.
Prices keep bumping up against resistance. And I think the Dow’s due for a breakout soon.
We’ll be right here talking about it.
The S&P 500 is great. The Nasdaq gets all the girls. But it’s the Dow that helps make us the most money.
Not so much by investing in it, but by monitoring its behavior to get us trading and investing in the direction of primary trends.
The Dow is the most important index.
Everybody’s wrong.
Ralph was right all along…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs