Consumer Spending is Low Yet Dow Jones is High

Today’s analysis easily fits our “what planet are we on?!” theme. As Rodney points out, the economic picture is dim. China’s output is slowing. Europe is on life support. Yada yada…

Yet, major stock market indices are hitting new highs. Both the Dow Jones Industrial Average and the S&P 500 recently hit levels they haven’t seen since 2008. The Nasdaq 100 hit 3,139 last Friday. The last time it traded at that level was November of 2000 – 12 years ago!

So which is it? Are we on Venus or Mars?

In search of answers, I’m comparing the major market indices against the Dow Jones Industrial Average. I have a proprietary indicator in my toolbox, along with some traditional inter-market analysis I apply.

My first comparison is of the Dow Jones Transportation Average (DJTA) versus the Dow Jones Industrial Average (DJIA). Long-time subscribers will recognize this argument because I’ve made it before.

Basically, the theory goes like this: if one stock market average is making new highs but another is NOT… be weary.

I’ve highlighted the divergence between the DJIA (which has made new highs) and the DJTA (which has NOT made new highs) before. Today, I’m comparing the relative performance of the two.

Here’s a chart that shows the Transportation Average outperforming the Industrial Average when the histogram points up and underperforming when it points down.

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The Transportation Average has been trailing behind the Industrial Average since late July. This suggests you should view the new highs in the Industrial Average with caution, as the Transportation Average doesn’t confirm the bullishness.

For my second comparison, I pit the Nasdaq 100 Index against the Dow Jones Industrial Average…

With the Nasdaq 100 leaning toward tech-oriented growth stocks and the Dow typically representing larger blue chips, comparing the two gives us a decent gauge of investor sentiment. The theory goes: Nasdaq outperformance indicates market bullishness, while Dow outperformance indicates market bearishness, or at least caution. So here’s the comparison chart:

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With positive bars since the beginning of August, the Nasdaq 100 has clearly been outrunning the DJIA. This indicates market sentiment is bullish. Investors seem willing to take on additional risk in the hopes of outsized returnrns. And they’re pursuing this strategy by buying Nasdaq 100 stocks instead of DJIA stocks.

These two comparisons paint opposing pictures. But that’s not necessarily a bad thing. With the market near major highs, it’s common to find contradictory evidence. I’ll be watching both of these indicators for a clearer signal as the rest of the year unfolds.

If you haven’t done so already read the Survive & Prosper issue on “Consumer Spending is Down Even with Lower Interest Rates.”