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Summary

  • The S&P 500 and the Nasdaq indices have rallied to new 2014 highs.
  • The Dow Jones Industrials are just a whisker away.
  • Understand the reasons for this underperformance.

Earlier this month investors on Wall Street cheered as broad market indexes such as the S&P500 (NYSEARCA:SPY) and the Nasdaq (NASDAQ:QQQ) rallied to new 2014 highs. Dow theorists were happy to see the transports (NYSEARCA:IYT) join the party as well. In earlier articles I cheered the resumption of leadership by the medical and medical devices sectors (NYSEARCA:XLV) and (NYSEARCA:IHI).

The only major index still shy of its 2014 January peak is that crusty old market index, the Dow Jones Industrial average, or its eponymous ETF (NYSEARCA:DIA). But boy is it close: Friday's high of $164.89 was only $0.05 of a new peak. Encouraging?

Yes - until you look closer. One of the nicest features about stockcharts.com is you can go to this page which shows a glance at charts of all thirty Dow Jones stocks on one screen.

Spoiler alert: the page is scary. Almost half of the stocks are nowhere near new highs for the year. Of these, I focused upon nine that were clearly responsible for the Dow's failure to reach new highs. (The others were in longer term downtrends, and in fact played no role in the Dow peak in January).

The stocks were Boeing (NYSE:BA), Chevron (NYSE:CVX), General Electric (NYSE:GE), Intel (NASDAQ:INTC), Coca Cola (NYSE:KO), 3M (NYSE:MMM), Travelers (NYSE:TRV), Visa (NYSE:V), and Exxon Mobil (NYSE:XOM).

Oil companies, capital goods, and financials; the narrow focus of the Dow might be hurting the index and DIA here. Broader indices of capital goods and financials, tracked by the sector SPDRS (NYSEARCA:XLB) and (NYSEARCA:XLF), have gone on to new highs.

Thus we focus again on the energy sector. The Dow has company in this regard: the broader energy SPDR (NYSEARCA:XLE) also has fallen shy of new highs. While we might be tempted to suggest this forecasting a slower economy in the near future, this scenario doesn't seem to fit. Why would savvy traders sell just energy shares? What about cyclicals and consumer discretionary stocks? Those sectors are doing fine.

For now - not forever - it is prudent to assume energy stocks and the DIA are falling prey to factors specific to the petroleum/fossil fuels industry. Specifically there are two jaws:

  • Increase in supply, due to fracking, horizontal drilling, and four-dimensional mapping.
  • Decrease in demand, due to conservation efforts and alternative energies.

Neither of these trends are likely to change in the very near future. Investors in companies like XOM and CVX should expect these periods of underperformance on a regular basis. But lower energy prices are bullish for the economy as a whole. Thus, long term investors should be careful about assigning negative implications to lagging performance in this sector. The energy sector my be the "sacrificial lamb" that enables the rest of the market and economy to boom.

Source: Dow Jones Industrials Are Lagging: Why?