As the first quarter of 2016 is drawing to a close, the Dow is up slightly for the year. Whether the Dow's bearish behavior from January and February reasserts itself or the bull reemerges depends on how many of its 30 stocks are rallying. Only eight of the Dow's stocks - Coca-Cola (NYSE:KO), General Electric (NYSE:GE), Home Depot (NYSE:HD), McDonald's (NYSE:MCD), Microsoft (NASDAQ:MSFT), Nike (NYSE:NKE), Travelers (NYSE:TRV), and UnitedHealth Group (NYSE:UNH) - currently have strong charts (not a good percentage).
What should investors be looking for? A perfect chart would be created by a stock with a price that steadily moves up and frequently hits new multi-years highs as it does. The moving averages will move in parallel and be aligned with the shortest-term on top, and the longest-term on the bottom (we'll look at the 10-week, 40-week and 65-week). Occasionally, the shortest moving average will dip down and touch the next longest one, but will then continue rising. Price also should never go under the longest-term moving average. Based on this criteria, Nike has the best looking chart in Dow. Home Depot looks almost as good, except that its price has fallen below the 325-day moving average twice in the last year. Below, are the three-year weekly charts for the two of them. The red line is the 65-week moving average, the blue line the 40-week and the yellow line the 10-week.
NIKE Three-Year Weekly Chart
Home Depot Three-Year Weekly Chart
The other six charts deviate increasingly from text book perfect. The next closest group are Travelers, UnitedHealth Group and Microsoft. The 10-week moving averages on these charts have fallen below the 40-weeks in the last year, but remained above the 65-week (with a minor exception in MSFT's case). They have since reversed and returned to a standard bullish pattern.
UnitedHealth Group Three-Year Weekly Chart
Travelers Three-Year Weekly Chart
Microsoft Three-Year Weekly Chart
The final three stocks - GE, MCD and KO - have more erratic charts and lack the advantage of consistent upward performance, one of the major advantages conservative investors are seeking when they buy large cap stocks. General Electric and McDonald's moved sideways, forming what is called a flat base, for almost a year and a half and two and a half years respectively (not fully visible on MCD's chart). Their moving average patterns were erratic during this period. This type of interruption for long-term rallies can form a springboard for an extended move up. It can be seen in the charts that McDonald's, especially, with its longer base, has rallied sharply since August 2015.
General Electric Three-Year Weekly Chart
McDonald's Three-Year Weekly Chart
Coca-Cola, although it also has the same erratic base pattern, has not had as big a move up as the other two stocks. It has moved mostly sideways in the last three years and it may be forming an even longer flat base that will propel it much higher in the future. When that will happen cannot be determined at the moment.
Coca-Cola Three-Year Weekly Chart
While steady, consistent upward movement of a stock is the Holy Grail of investors, it's difficult to achieve. Even very few Dow stocks offer it, and in a bear market even these stocks are capable of going down. They usually decline much less, of course, than the high flyers of the previous bull market - unless they were one of the high flyers themselves. The Dow has contained some of these in the past (GE, lost close to 90%, UHN lost approximately 75%, MSFT around 60% during the Credit Crisis bear market) and does have some today. Generally, the less excitement that surrounds a stock, the more safety it offers. In bear markets, safety should be paramount for investors and this even needs to be taken into account with Dow stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.