Bernie Schaeffer: The Dow and the S&P 500 – Then and Now
By Bernie Schaeffer
7/1/2002 12:35 PM ET
In terms of relative strength, the Dow Jones Industrial Average (.INDU - 9227.40) has mounted a monster rally versus the S&P 500 Index (SPX - 980.62) since mid-2000. Looking back, a similar rally ensured from mid-1985 until August 1987, two months before the last truly historic and abysmal single-day stock market crash on "Black Monday." See the charts illustrating this outperformance below. Also note that both indices were rallying during the mid-1980s while today's bear market has both trapped in a decline.
I'm not necessarily forecasting a dramatic market crash in the near future, but were I a bullish investor, I would not be encouraged by this pair of charts.
The Dow in the bull run of the 1980's was fueled by stocks like General Foods that were trading over $100, and today high-priced equities such as Minnesota Mining and Manufacturing (MMM: sentiment, chart, options) are leading the Dow charge. But in the 1980's the bears constantly complained that the Dow was being pumped up by a narrow group of high-priced stocks. Now, the silence is deafening.
You might ask: "Is this mere 'data mining' or is there perhaps some significance to the Dow being the strongest index just ahead of a market plunge?" As I see it, the Dow is the "soundbite index" - the one quoted by Peter Jennings, Dan Rather and Tom Brokaw in the 15 seconds devoted to the financial markets on most evenings. If the soundbite index is holding up well, then the investing public feels better. And in a bear market, one of the main goals of the smart money is to make John Q. Investor feel as good as possible about the market. Why? So the smart players can go about liquidating their positions ahead of the market plunge, leaving John Q. holding the bag. And John Q. has been acting this year as if on cue, with 2002 mutual fund inflows smartly ahead of 2001 despite the horrible first half the market has experienced and the two-plus-year bear market. Care to guess who has been selling in earnest while the public has been buying? Hint: They're the opposite of "dumb."
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