The astonishing performance of the Dow Jones Industrial Average (DJIA) has dominated the S&P 500 index so far in May (SPX). Some expect this recent debacle against the broader SPX to continue due to factors that may not go away anytime soon. There are two factors at play, related to the unique structure of the DJIA and what appears to be technical modifications underway at the SPX.
Dow Price Weighting Advantage
The additional horsepower that powers the Dow 30 is provided by the price weighting method. Unlike the S&P 500, which assigns weights to stocks in the index based on a company’s market capitalization (total market value), the Dow 30 index is a price-weighted index. This means that the performance of the highest priced stocks has the most impact on the index.
So far in May, this structure has proven advantageous. DJIA’s heavyweight performers are like Amgen (NASDAQ:AMGN) soared, pushing the Dow higher, while the S&P 500 experienced a different mathematical reality. For SPX, EPAM Systems (NASDAQ:EPAM) The effect is to reduce the overall performance of the index.
Technology corrections and Dow stability
Market experts like Capthesis founder Frank Cappellelli are pointing to the possibility of a high-tech correction in the S&P 500 index. The S&P’s tech weight (30%) has been exposed to the recent weakness in tech stocks. He believes the Dow Jones Industrial Average has a more balanced sector allocation (19% technology, 24% financials), making it less susceptible to industry-specific headwinds.
John Kolovos, chief technical market strategist at Macro Risk Advisors, observes that the S&P is undergoing a “correction over time,” suggesting a period of sideways trading. He pegs resistance for the S&P at 5,265 and 5,390, and support at 4,950.
Can the Dow continue its astonishing rise??
The Dow continues to “surprise” the market for seven straight trading days. Historically, he has only had 190 consecutive positive days. And half the time (53%), the DJIA continues to rise over the next month.
For the Dow to continue to outperform the S&P 500 for the remainder of 2024, several things need to happen. First, we need to extend the market rally and lift sectors that are currently underperforming in the S&P but performing well in the Dow. Second, the recent correction in tech stocks should continue, further deteriorating the S&P’s performance.
Use the TipRanks ETF Comparison Tool and SPDR S&P 500 ETF to look at the period from early 2024 (NYSE:Spy) and SPDR DJIA ETF (New York Stock Exchange:Diamond) as a close proxy for the index, we find that year-to-date, investors in SPY are the clear winners, up 8.81% and DIA up 3.61%. However, when averaged over the past three months, that difference in performance has narrowed, with DIA outperforming him by 0.83% on trading days over the past month, and as of Thursday, the Dow continues to rise.
Important points
The recent outperformance of the Dow highlights the impact of index methodology. With our price focus and more balanced sector allocation, we are well positioned to take advantage of current market trends. While history is no guarantee, active investors will be watching to assess whether the Dow can maintain its lead or whether the broader S&P 500 can regain its footing and regain dominance. Masu.
