Dow Jones Indices: One to buy, one to avoid and one to monitor

The Dow Jones Industrial Average (DJIA), Dow Jones Utility Average (DJU), and Dow Jones Transportation Average (DJT) are three distinct indices that each track different sectors of the U.S. economy. They are in different states - one has just flashed a sell signal, and the other two are moderate buys.

The replacement to one Dow Jones index, that I use, is in a raging bull market. 

Dow Jones Industrial, Dow Jones Utilities, and Dow Jones Transportation

1. Dow Jones Industrial Average (DJIA):

   • Focus: The DJIA comprises 30 large, publicly-owned companies based in the United States that are industry leaders. It is among the world's oldest and most-watched stock indices.

   • Sector Representation: It covers a broad range of industries except for transportation and utilities. The DJIA includes technology, consumer goods, healthcare, finance, and energy companies.

   • Purpose: The DJIA is used as a barometer of the general health of the U.S. stock market and the economy. It's a price-weighted index, meaning companies with higher stock prices have a more significant impact on their performance.

   • Weakness: Instead of dividing by the number of stocks in the average, as in an arithmetic average, the sum of the component stock prices is divided by a special divisor. This has led to the fact that United Health has a 10 percent weighting in the index, although its market capitalization is much smaller than, e.g., that of Apple, which has a 3.5 % weighting (because the share price is higher).

1. Dow Jones Utility Average (DJU):

   • Focus: The DJU tracks 15 of the largest utility companies in the U.S. These companies are typically involved in producing and delivering electricity, water, and natural gas.

   • Sector Representation: This index focuses exclusively on the utilities sector, which tends to be less volatile and dividend-focused than other sectors. Utilities are often considered defensive stocks, which tend to perform relatively steadily regardless of the overall economic climate.

   • Purpose: Investors and analysts use the DJU to gauge the performance of the utility sector, which can be a bellwether for economic activity and interest rate changes. Utilities pay high dividends, which get more attractive with low yields and have a high debt. The companies profit from a low-interest rate environment.

2. Dow Jones Transportation Average (DJT):

   • Focus: The DJT is the oldest U.S. stock index, consisting of 20 companies in the transportation sector.

   • Sector Representation: This index includes airlines, railroads, trucking companies, and logistics firms. It does not overlap with the industrial and utility sectors covered by the DJIA and DJU.

   • Purpose: The DJT is often used by investors to confirm trends in the DJIA, based on the Dow Theory.

Dow Theory

Dow Theory is a framework for analyzing stock market behavior developed by Charles Dow, the founder of the Dow Jones Industrial Average (DJIA) and a pioneer in market analysis, emphasizing the relationship between the DJIA and the Dow Jones Transportation Average (DJT).

One of the key concepts of Dow Theory is the idea of "confirmation" or "divergence" between these two indices:

1. Confirmation: According to Dow Theory, the movement of the DJIA should be confirmed by the DJT. This means that if the DJIA is in a bullish trend, the DJT should also show a similar bullish trend, indicating overall market health. The rationale is that industrial companies produce goods (reflected in the DJIA), and these goods need to be transported (reflected in the DJT). So, if both indices move in the same direction, it suggests a coherent and healthy economic environment.

2. Divergence: Divergence occurs when the DJIA and DJT do not confirm each other's trends. For example, if the DJIA is trending upward (indicating vigorous industrial activity), but the DJT is trending downward (suggesting a slowdown in the transportation of goods), this could be interpreted as a warning sign. According to Dow Theory, such divergence can signal potential weakness in the market. It suggests that even though industrial companies are performing well, the lack of transportation demand could indicate that the market's upward trend is not sustainable.

Replacing The Dow Jones Transportation Index by Semiconductors to gauge the health of the tech industry

Because of its composition, the Dow Jones Transportation Average (DJT) has limited power to predict the state of the tech industries. Some analysts have proposed replacing the DJT with a semiconductor index to assess the state of the tech industry.

1. Economic Indicator for Tech Industry:

   • Semiconductors are foundational to the tech industry and are used in everything from computers and smartphones to cars and home appliances. As such, the performance of semiconductor companies can be a leading indicator of the overall health and direction of the tech sector and, by extension, the broader economy.

2. Market Dynamics:

   • The semiconductor industry is known for its cyclical nature, influenced by factors like global supply and demand, technological advancements, and geopolitical issues. This index would provide insights into these dynamics and their impact on the tech sector.

Which Semiconductor index to choose

For tracking the semiconductor industry's performance, several notable indices and exchange-traded funds (ETFs) could serve this purpose effectively.

1. Philadelphia Semiconductor Index (SOX):

   • The SOX is one of the most widely followed indices for the semiconductor sector. It tracks the performance of major companies in the semiconductor industry, including manufacturers of chips and semiconductor equipment.

   • The index is market-cap weighted and includes U.S. and international companies, providing a comprehensive view of the global semiconductor industry.

2. iShares PHLX Semiconductor ETF (SOXX):

   • This ETF tracks the Philadelphia Semiconductor Index and offers investors exposure to U.S.-listed stocks that design, manufacture, or distribute semiconductors.

   • It's a popular choice for investors seeking broad exposure to the semiconductor sector through a single investment.

3. VanEck Vectors Semiconductor ETF (SMH):

   • SMH is another widely recognized ETF that tracks the MVIS US Listed Semiconductor 25 Index. This index includes the largest and most liquid companies in the semiconductor industry.

   • The ETF exposes various companies within the semiconductor sector, from large multinationals to smaller, more specialized firms.

4. SPDR S&P Semiconductor ETF (XSD):

   • The XSD tracks the S&P Semiconductor Select Industry Index, offering a slightly different mix of companies than SOXX and SMH.

   • It's an equal-weighted ETF, offering a more balanced exposure across its holdings rather than being skewed toward the most prominent companies.

Each option has unique characteristics, such as the specific companies included, the weighting methodology, and the geographical focus.

I use the iShares PHLX Semiconductor ETF (SOXX) for my analysis. 

Dow Jones Industrial Average

The DJIA has just broken its downward consolidation channel to the upside. As of writing (17th November), it hovers at around 34930, a first resistance level. The index is currently in wave 3 (usually the extended one) of potentially a five-leg-up move.

I expect this level to break and the index to move toward the next resistance level at 35766.

I believe the index will move close to the ATHs around 36.950 by year-end/ mid-January 2024.

In contrast to the NASDAQ, the current wave structure does not really exhibit impulse wave properties.

I am more bearish and think that after this seasonal rally, the market may slide/ go sideways in the first quarter of 2024.

I am skeptical that there will be a move that carries the DJIA much higher than the previous top. A double top or something similar seems more likely.

Dow Jones Utilities

The DJU just broke its downward trend, which started in the summer of 2023.

It may have completed a three-leg wave down and may well be in the first wave of a three-wave up formation.

This could carry the index to a maximum level of 955 to 990, a heavy resistance zone. The first resistance is at 900. I expect the index to swiftly move there and start some form of consolidation before the move to the 955 - 990 level may occur.

A break above the upper channel line of the downward channel, which has been in place since the summer of 2022, would confirm this count.

The upward trend of the DJU coincides with rising bond prices and declining yields. I expect the long bonds to reach 4 percent quite soon. Max potential is at the 3.5 % level.

Dow Jones Transportation

The DJT just broke its upward channel to the downside. This is a bearish sign for the health of the U.S. economy.

It usually signals low growth or even a recession. In Dow Theory, we may soon see a profound negative divergence. A DJIA reaching new highs and a DJT reaching a new 52-week low.

For the bullish count to prevail, the DJT must find its way back into the upward-sloping trend channel (which it just broke to the downside).

My preferred Elliott wave count calls for a 5-leg impulse wave down from the top at the end of July and a 3-leg up since the end of October.

The next resistance is at the 15.250 level, followed by the 16.000 level. A move above the lows of wave 1 would render this count wrong.

The DJT has limited importance for the tech industries. It is still important as a leading indicator for traditional industries.

Semiconductor Index

The SOXX ETF is in a bullmarket. It shows similar properties as the NASDAQ 100. It has completed four waves up and is now in its fifth wave, like the NASDAQ 100.

There is a visible divergence between the Dow Jones Transportation and the SOXX. This shows that the tech industries have decoupled from the other industries.

Actionable Advice

(1) SOXX: By the Dip

(2) DJT: Sell the Rip.

(3) DJIA and DJU: Buy small positions, only tactical trades in the direction of the larger trend