Dow Jones vs. S&P 500

The chart above shows the relative performance between the Dow Jones and the S&P 500 on a yearly basis.

You can see that we are currently sitting right on the 125-year support line. (This may possibly be the longest-lasting support line I've ever seen).

This chart may be indicating that, in the years to come, the Dow Jones may outperform the S&P 500.

As you know, the Dow Jones consists of 30 blue chip companies. These large, well-established, financially-sound companies have operated for many years and have dependable earnings, and usually pay dividends to investors. Perhaps the charts are telling us that in an era of stagnating growth, persistently high inflation, and higher interest rates, the Dow Jones will outperform.

We see confirmation from the yearly Stochastic RSI (shown below), which appears ready to begin oscillating back up.

Once the K line crosses above the D line, and the Stochastic RSI begins to oscillate back up on this chart, the momentum can provide tailwinds for the Dow Jones to outperform the S&P 500 for years.

Here's something to ponder: If the charts are showing that the Dow Jones may outperform the S&P 500 for years to come, and the charts also show that the S&P 500 may outperform the Nasdaq 100 for years to come (click on my below post for more details) what does this say about the relative performance between growth and blue chip stocks in the years to come?

The charts may be hinting that when inflation remains persistently high and growth persistently low, blue chips stocks may outperform, especially relative to the technology sector (Nasdaq). Take a look at the chart below which highlights the similarities between the relative performance of the Dow Jones and Nasdaq today and in 2000, at the start of the Dotcom bust.

However, it's important to note a few things. First, ideally, we should wait until 2022 closes to definitively make this type of comparison on the yearly chart. Second, this is merely a relative performance analysis. Therefore, it's possible that even blue chip stocks may tank during the coming recession (click on my post below to read more about my thoughts on the coming recession).

Relative performance may show that one asset or index may outperform another asset or index, but it technically does not indicate whether either will go up or down. The Dow Jones may simply just outperform the S&P 500 and the Nasdaq by declining less than them. Therefore, trades should not be based only on relative performance.

To further parse out where the greatest alpha (alpha generally refers to outperformance) may be during the coming recession, I analyzed each Dow Jones component to find which may be the best to hold individually during the coming years.

I found that Apple and Microsoft (which are, of course, also in the Nasdaq) will likely underperform. These assets are extremely overbought on the highest timeframes and are showing signs of bearish divergence.

In particular, I see bearish divergence on Apple's 6-month chart, going all the way back to the Great Recession. See below for an analysis:

We see above that Apple has been experiencing bearish divergence since 2007.

From late 2019 into 2021, during a period of unprecedented quantitative easing and limitless cheap money from the Federal Reserve, Apple underwent what I call a "fake out". I consider a fake out to be a period when RSI breaks above its trendline after a period of bearish divergence and while in overbought territory. Typically this signals the final phase of a bull run (though since this is a 6-month chart, the time it will take Apple to show clear signs of decline will take months, if not years).

As you can see above, now Apple is testing the RSI trendline from below. This trend line is likely to resist the RSI (and therefore the price) back down. The decline of Apple is going to be quite a shock to the broader market as Apple is contained within so many ETFs and mutual funds and is indeed the most capitalized company in the world. I will try to write a longer post about Apple in the future but will say that: In my opinion, based solely on the charts, Apple is going to disappoint a whole lot of people over the coming years.

On the flip side, several Dow Jones components are showing the potential for upside over the coming years. Specifically, I see signs of a long term bottom in IBM and Walgreens (WBA). See the below charts.

What the above chart shows is that Walgreens is sitting on support in its relative performance to the S&P 500. Indeed, a double top formed, and the measured move down has been completed. Below is the yearly Stochastic RSI oscillator for Walgreens relative to the S&P 500.

The chart above shows that the Stochastic RSI oscillator on the yearly chart of Walgreens performance relative to the S&P 500's performance is ready to oscillate higher. This could potentially provide years, if not a decade or longer, of a tailwind for Walgreens to outperform the broader market. (I have no clue about the fundamentals of Walgreens, but since price discounts everything all investors know and act on, I do not have to analyze the fundamentals of Walgreens to know that it may outperform the S&P 500 in the years to come).

My strategy is to accumulate a position in Walgreens (WBA) at the first signs of a bullish setup (a bullish setup is necessary because, again, one should not trade based on relative performance alone). Once I enter a position I then plan to swing trade it throughout the coming years. (By swing trade I mean: First, buy a stock when it is showing a bullish setup (i.e. consolidation), hold with a trailing stop loss until it becomes over-extended on the weekly timeframe, then sell some of my position when weekly is very overbought and has a low setup probability, and then buy back the sold position (plus more using the profit) when it appears consolidated on the weekly timeframe and ready to move up again. I continue this pattern until the yearly chart indicates a top is in.

I plan to do the same for IBM which is a Dow Jones component that is showing a very similar setup as Walgreens. See below for my charts.

These are just my thoughts and are not meant to be financial advice or investing recommendations.

Be sure to leave a like if you agree or comment or if you disagree.

Although I definitely see a recession coming in the year(s) ahead, there are plenty of long opportunities out there. There is one particular stock that I think will absolutely explode over the coming years. I've already made about 50% on my position in it in the past month. I'll be posting more about it in the weeks to come. Those who follow me may already know which company I'm talking about!

Comment:

Since posting this, the DJI has significantly outperformed the SPX. However, be cautious: As noted, relative outperformance does not necessarily mean that the DJI will continue to perform well, it could simply mean that the DJI will decline by a lesser amount than the SPX if both fall.