The tremendous performance of the Dow Jones Industrial Index (DJIA) so far in May has it dominating the S&P 500 index (SPX). Some expect this recent trouncing of the much broader SPX to continue because of factors at play that may not quickly fade. The factors at work are twofold and relate to the unique structure of the DJIA, coupled with what appears to be an ongoing technical correction in the SPX.
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Dow’s Price-Weighting Advantage
The horsepower that is strengthening the Dow 30 is provided by its price-weighting methodology. Unlike the S&P 500, which assigns weight to stocks in the index based on the company’s market capitalization (total market value), the Dow 30 is a price-weighted index. This means that the performances of the highest-priced stocks impact the index the most.
So far in May, this structure has proven advantageous. While heavyweight performers in the DJIA like Amgen (NASDAQ:AMGN) have surged, pulling the Dow upwards, the S&P 500 experienced a different mathematical reality. For the SPX that’s heavily weighted with lagging tech giants such as EPAM Systems (NASDAQ:EPAM), the effect is to dampen the index’s overall performance.
Tech Correction vs. Dow Stability
Market experts like Frank Cappelleri, founder of CappThesis, point to a potential tech correction within the S&P 500. The S&P’s heavy tech weighting (30%) exposes it to the recent slump in tech stocks. The Dow, with a more balanced sector allocation (19% tech, 24% financials), he believes, is less susceptible to this industry-specific headwind.
John Kolovos, chief technical market strategist at Macro Risk Advisors, observes the S&P undergoing a “correction through time,” suggesting a period of sideways trading. He identifies resistance levels at 5,265 and 5,390 for the S&P, while support sits at 4,950.
Can the Dow Continue to Wow?
The Dow has continued to “wow” the market for seven straight trading days in a row. Historically, it has only had this many consecutive positive days 190 times.
For the Dow to outperform the S&P 500 for the rest of 2024, a few things need to happen. Firstly, the market rally needs to broaden out and lift sectors currently underperforming in the S&P and well represented in the Dow. Secondly, the recent correction in tech stocks needs to continue, further dampening the S&P’s performance.
Taking a look at the periods since the start of 2024 using the TipRanks ETF Comparison Tool with the SPDR S&P 500 ETF (NYSE:SPY) and the SPDR DJIA ETF (NYSE:DIA) used as close proxies for the indexes, we see that year-to-date, investors in the SPY are clear winners with an 8.81% gain versus 3.61% in the DIA.
But that performance lead shrinks when you average the last three months. Over that period, the DIA has outperformed the SPY, and as recently as Thursday, the Dow continued to gain ground.
Key Takeaway
The Dow’s recent outperformance highlights the influence of index methodology. Its price-weighting and more balanced sector allocation position it well to capitalize on the current market dynamics. While history offers no guarantees, active investors will be watching to see if the Dow can maintain its lead or if the broader S&P 500 can regain its footing and reclaim its dominance.
