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Intermarket Relationships: S&P500 versus the Dow Jones Composite 65 Index

June 30, 2010

Related Reading: my post on “Perfect Alignment” is a good refresher https://cssanalytics.wordpress.com/2010/01/21/perfect-alignment-and-sp500-returns/
see the post by Rob Hanna of Quantifiable Edges on the Nasdaq vs the S&P500 <a href="http://quantifiableedges.blogspot.com/2009/05/simple-powerful-timing-indicator.html&quot;

While spending some rare time doing personal testing, I postulated the theory that if the Nasdaq leading the S&P500 was bullish then the S&P500 leading a more senior index of large stocks should also by extension be bullish. The logic underlying the Nasdaq/S&P500 relationship is based on the Nasdaq representing both a superior proxy for growth and also a more speculative index. A leading Nasdaq represents a risk appetite for fast-growing but also liquid stocks. As a consequence when the Nasdaq outperforms, the S&P500 tends to do much better on average. This same logic can be applied by thinking of the S&P500 as being like the Nasdaq, and finding a broad index of “old-line” companies that are less risky and have lower growth prospects for comparison. One such example is the Dow Jones Composite 65 Index which is comprised of the Dow30 the Dow Jones Utilities Index and the Dow Jones Transports Index. Here is an excerpt describing the Dow Jones Composite 65 from Investopedia:

“The combination of the Dow Jones Industrial, Transportation and Utility averages used to be a broad measure of the U.S. economy, as those sectors were once the lion’s share of economic production. This is no longer the case, as industries such as healthcare, technology and finance now include some of the largest companies in the world. While the DJIA has, in recent years, included some modern companies in its “industrial” average (such as Microsoft and Intel), most of the Dow Jones 65 stocks are focused in old-line businesses, and do not appear to represent a broad measure of economic performance.”

to be continued…………

3 Comments leave one →
  1. kostas permalink
    July 1, 2010 12:37 am

    David, your original post was about a perfect aligment taking place when the SPX is leading the Russell 2K and Nasdaq leading the NYSE. This post talks about Nasdaq leading the SPX… a bit confusing, it seems.

  2. Aristotle permalink
    July 2, 2010 7:15 am

    I believe David is indicating that the S&P 500 leading the ^DJA is analogous to the Nasdaq leading the NYSE.

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