Move The Senior Index And The Rest Will Follow

• Posted by DynamicHedge
• on April 28th, 2011

When looking for bullish cues traders usually watch the small cap indexes like the Russell 2000 to see if money managers are willing to put serious risk on.  Good performance in these indexes is bullish because these are more speculative issues and indicate that traders are willing to commit aggressively to the long side.  Lately the old crusty Dow Jones Industrial Average has been leading the charge higher.  There seems to be a concerted effort to drag the rest of the market higher by way of targeting momentum Dow components.

I wrote this back when we were trading 1320 in the S&P:

There is a surefire way for those with an agenda to push broad indexes higher and that is to buy tech and buy dow components.  If you can keep a bid in those markets we will not have more meaningful downside.

We did have some limited downside thanks to the Standard and Poors ratings pirates, but that’s another story.

Here’s the Dow and Russell 2000 performance for the month of April:

Traders, especially those with academic tendencies, love to hate on the $DJIA, and with good reason.  The Dow Jones Industrial Average is the most regal yet ghetto of all the indexes.  This holy index is cursed with a price-weighted calculation and component additions and deletions voted on by the Wall Street Journal editorial board.  And yet, no other index gives a more pure view on what is happening among US industrial landscape (except maybe the OEX).

I’ve been using the Dow as my gold standard lately.  This means that when the S&P, Russell 2000, and DJIA are in disagreement I “trust” the Dow.  This market flavor will change in the coming weeks and months but we’ll have to see some good divergence first.

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