Dow Jones Breaks 30,000: What’s Next?

Adam Lemon

When stock markets, especially the U.S. stock market, have made new all-time highs in the past, they are likely to continue moving higher over the short-to-medium term. This suggests that traders and investors should consider buying stocks now.

The Dow Jones Industrial Average (INDEXDJX: .DJI), a major U.S. equity index representing thirty of the largest U.S. companies, closed yesterday at 30,046.24 – an all-time record high closing price and the first ever close above the psychologically important 30,000 level.

The Dow was historically the most important stock market index in the U.S. market, but has been superseded in importance over recent decades by the S&P 500 Index (INDEXSP: .INX) which is comprised of the five hundred largest publicly quoted U.S. companies. The S&P 500 Index closed yesterday at 3,635.41. This was also a record-closing price, although the index made its intraday record high price on Monday 9th November earlier this month.

These factors suggest that although we are clearly in a bull market for U.S. stocks, which is likely to advance higher in the near-to-medium term, the current advance is led by more traditional blue-chip stocks, with interesting cyclical implications for traders and investors within the U.S. market. Furthermore, global stock markets are mostly following the U.S. advance, with the global MSCI World Index (.WORLD:MSCI) closing at a new all-time high yesterday of 2589.39.

When stock markets, especially the U.S. stock market, have made new all-time highs in the past, they are likely to continue moving higher over the short-to-medium term. This suggests that traders and investors should consider buying stocks now.

Which Countries and Sectors are Leading the Bull Market?

It is worth taking a closer look at how stock market indices have performed over recent months by country and sector, especially if you are an investor or trader looking to use momentum trading strategies to identify and profit from the “hot hand”. Academic studies have shown that buying sectors with recent outperformances has been a profitable trading or investing strategy in the past.

Stock Markets by Country

The tables of top performing national indices over the past three and six months, respectively, show that some of the best performing national indices are as follows:

3 Month Performances

Index

Country

Performance

Russell 2000

U.S.A.

+17.63%

SENSEX

India

+14.75%

IBEX 35

Spain

+14.56%

Nikkei 225

Japan

+12.88%

KOSPI

South Korea

+12.88%

 

6 Month Performances

Index

Country

Performance

SENSEX

India

+45.46%

Russell 2000

U.S.A.

+32.45%

NASDAQ 100

U.S.A.

+28.65%

KOSPI

South Korea

+31.24%

BOVESPA

Brazil

+28.38%

 

The data suggest several noteworthy points:

  • The broadest major U.S. stock index, the Russell 2000, and the main stock market indices of India, Japan, South Korea, and Spain have all outperformed the Dow Jones 30, NASDAQ 100, and S&P 500 indices.

  • Asian indices seem to have performed especially strongly over both three and six months, with investments in India and Japan producing excellent returns over these periods.

  • Certain sectors of the U.S. stock market, as usual, have performed very strongly compared to the global average.

  • Stock market returns this year generally are above the average seen in recent decades.

Stock Markets by Sector

Just as global investors looking to buy stocks in a bull market may choose which countries to focus on, so too, investing by market sector can also be a criterion. Rotational market theory sees different sectors of the economy – e.g. consumer goods, technology, etc. as likely to perform differentially due to wider macroeconomic and also microeconomic conditions. Analysts see the U.S. market as currently undergoing a rotation towards “value” stocks.

Examining the U.S. stock market as the world’s largest is a good place to evaluate sectoral performances. This can be done very easily as there are plenty of sectoral indices. Let us look at the best and worst performers in the U.S. market over the past month.

Best Performers

U.S. Sector Index

1 Month Performance

Aluminum

+52.76%

Coal

+48.51%

Oil Equipment & Services

+39.26%

Marine Transportation

+35.91%

Exploration & Production

+33.36%

 

Worst Performers

U.S. Sector Index

1 Month Performance

Tires

-11.71%

Electronic Office Equipment

-10.64%

Gold Mining

-5.50%

Mining

-5.50%

Toys

-4.61%

According to classic sector rotational theory, it is not easy to categorize the current market cycle from this data. Yet it is clear that the dominant paradigm in global markets has been strongly impacted by the coronavirus pandemic and recent news, which suggest that an effective vaccine will be able to ensure something close to a return to normality by the end of 2021. As such, we are seeing strong bullishness in raw materials, transportation, and exploration in the U.S.A. and these sectors are relatively strongly represented in the Dow Jones Industrial Average and are mostly responsible for pushing its price above 30,000 yesterday.

What Does this Mean for Traders and Investors?

One of the easiest ways traders and investors have been able to put market odds in their favor in recent decades has been to buy stocks, especially U.S. stocks, which are components of major indices, during bull markets.

The best performing stocks have tended to be those which are already outperforming the rest of the market, and which are members of outperforming market sectors. This has been demonstrated by the relative success of momentum trading strategies.

Investors are likely to do best by buying actual stock and using a time-based or technical strategy to determine profitable exits.

Traders are likely to do best by trading outperforming stocks by sector in the long direction intraday using short-term technical analysis strategies.

There are currently excellent reasons to see strong opportunities to profit by buying stocks.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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