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Daily Market Update – July 21, 2015 (Close)
Earnings are coming through this morning and some of the methodology differences in calculating the DJIA and S&P 500 resulted in another divergence between the two this morning and it widened during the day’s trading session. That happens whenever a DJIA component, or two, that happen to be relatively high priced per shares, as was the case this morning, have large moves in the same direction. The size of those moves is more accentuated in the DJIA than in the broader index that is market capitalization weighted, rather than being price weighted. For example, IBM’s move this morning had contributed about 56 points to the DJIA, although in the wrong direction. United Technologies is doing the same, but only reducing the index by about 25 points. Of course, they have some considerable impact on the S&P 500, as well, since they are so large, but much less than on the DJIA and none on the NASDAQ 100. In fact, by the time the closing bell rang IBM and United Technologies accounted for about 110 points of the DJIA’s loss. While that’s always interesting, sometimes those divergences actually say something more than simply reflecting on the way the indexes are calculated. In the previous week that dichotomy existed all through the week and included the NASDAQ 100, as well, which was the great out-performer, with the DJIA lagging behind the S&P 500, as well. What the recent market has been reflecting is that the advance from the 5% mini-correction has been very much led by a small number of very large market capitalization stocks. Those stocks also happen to have been NASDAQ 100 stocks. Late this morning there was actually something on CNBC that highlighted just that point, but they went a step further by recalculating the NASDAQ 100 if the big gainers had been removed. Suddenly, those large cap NASDAQ stocks were seen as having contributed nearly 100% of the NASDAQ’s very impressive gain. Suddenly the actually health of the NASDAQ 96 or so wasn’t that great. While the market was just a hair away from setting a new high on the S&P 500 and while the NASDAQ has again closed at another new high, the advance has been nowhere near as broad as you might believe. It’s very much been a phenomenon of a handful of companies that are distorting the indexes, especially the S&P 500 and the NASDAQ 100. That creates a condition where you can feel left behind, but are very much in the same boat as most people, unless they happen to have shares in those great gainers. Hopefully some of the good fortune of those that have been carrying the markets will diffuse a little bit to the rest of the market and carry it along for the ride higher. That, surprisingly, wasn’t going to be th case today, even though the DJIA was far worse than the S&P 500 to end the day. After a good beginning to earnings season, this morning had brought some disappointing numbers, but no real surprises. There are still lots more earnings reports to come and for the moment not too much economic news. Neither is there international events on the immediate horizon to hijack our attention. While earnings will continue to come in at a strong pace for the next week or so the re-strengthening of the US Dollar may again begin to temper forward guidance, although that hasn’t been the case to this point. While I’d like to see some increase in volatility in order to make option premiums more attractive, at the moment that’s outweighed by a hope that the market does get to follow in the path of some of those recent great NASDAQ gainers and simply move higher. I would trade off opening new pos
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