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 one interesting chart that I don’t think gets the credit it deserves: The Dow Jones Composite Index.
If you want a broad measure of the most important stocks in America, this is it.
I really like how this index represents all of the stocks in the three major Dow Jones indexes: Industrials, Transportation and Utilities.
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.
For our purposes, 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 two years. The range goes from about $7,350 to $8,600:
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 $8,600?
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.
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 U.S. stock market is in a massive range, at best.
I think there is a lot of overhead supply near that $8,600 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&P 500 or Nasdaq. I’m not sure that it’s the best time for that right now.
I prefer the names themselves.
To wise investing,
Editor, Big Market Trends