Dow to S&P Ratio at a Six Year High

Leaving aside arguments over price-weighted indexes, the Dow has recently been doing better—or rather—falling slightly less dramatically than the S&P 500. The two indexes generally move in tandem, but divergences aren’t unusual and we’re seeing one now.

The ratio of the Dow to the S&P 500 is now at a six-year high. As of yesterday’s close, the Dow is 9.64 times the S&P 500. (This is, of course, index value and not the market value of the two indexes.)

If this trend continues, the ratio could soon reach a 32-year high—and if the trend continues further still, the ratio could break 10.0 for the first time in 42 years.

If the Dow had performed as well as the S&P 500 since early 2006, it would be over 1,000 points lower today.

Comments

[NotChuck:]

So does that mean the Dow is more likely to fall to get back in line or that the S&P is more likely to rise to get back to historical averages? What has happened in the past in the case where this ratio has increased? Does the DOW decline or does the S&P go up?

2008 Oct 29 01:07 PM

[Urbane Gori...:]

Just reading a book that suggests that there are three stages from a recovery to a rebound.

(1) Flight to safety in the large cap (DOW) and as the market improves
(2) Accumulation of mid cap, then as the market goes into bull mode
(3) Small cap ramps up.

The interesting point is that the small cap moves higher and faster than the other two segments. Apparently at this point, all the easy fruit has been plucked from the other two caps and there is a rush to the untouched portion of the market. Also, as credit becomes more liquid, small caps can more easily fill the voids that are in the market.

Thanks for the article,

jegan ;-)

2008 Oct 29 02:09 PM