The Dow's Dismal Performance

This is an excerpt from the August 2014 issue of Richard C. Young’s Intelligence Report, where Dick Young helps investors compound wealth with income generating strategies that seek to avoid risk. Dick uses his proven inference reading based investment strategy to recommend stocks, bonds, mutual funds, and exchange traded funds generating attractive shareholder returns. Richard C. Young’s Intelligence Report is designed for the discerning investor not the fad driven speculator.

Since September 20 of last year, the S&P 500 is up 15.5% and the Dow is up 10%. Historically, the 30-component Dow and the 500-component S&P 500 have moved in lockstep. But over recent months, that has not been true. Why has the Dow lagged the S&P 500 so badly since September 20? That is the day Visa, Goldman Sachs, and Nike replaced Alcoa, Bank of America, and Hewlett Packard.

I didn’t like the changes then, and I still don’t like them today. I dropped the SPDR Dow Jones Industrial Average ETF (DIA) from my Mutual Funds Master List as a result. The new additions to the Dow have been a big contributor to its lagging performance. Since the changes were made, the average return of the three stocks that were dropped from the index is 50%, and the average return of the new additions is 7.7%. Continue to steer clear of the SPDR Dow Fund.

A Major Cyclical Peak

See Charts #1 through #6 [ed. note: not shown in excerpt] in my Economic Analysis. These charts, along with my companion chart below, which shows the price-to-sales ratio for the S&P 500 (since 1955), point to a major cyclical peak ahead.

Price-to-Sales Ratio Fright

The price-to-sales ratio is pointing to two standard deviations. That is a frightening point in a cycle and has been hit only once since my days at Shaker Heights Junior High School. A warning light for the financial markets is clearly flashing.