Maybe this index stuff ain't what it's cracked up to be. As the
closes out one of the best years ever and the venerable
Dow Jones Industrial Average
has finally joined the broader
in hitting a record, other Dow Jones indices are struggling along.
With all the talk of diverging Nasdaq and Dow indices, the struggling S&P 500 and the ways investors are trying to play it, there's some interesting divergence within the Dow itself, and it is serving to render useless what once was a key indicator of inflation.
It's hard to believe both the transportation and utility averages are down in 1999. Even more telling is their relative performance since the general market low of Oct. 8, 1998. The transports were the strongest of the three indices all the way to Aug. 6, 1999, after which the industrials took over the top slot for good.
Market technicians of all stripes owe a huge debt to
, author of the eponymous Dow Theory. One tenet of his theory was the need for different segments of the market to confirm one another in making new highs for a bull move to continue. Failure of the averages to confirm one another signaled a dangerous divergence in the market -- a narrowing, if you will -- with the likelihood of a massive correction to follow.
The transports and utilities are not confirming the industrials, and the industrials themselves took their sweet time, from Aug. 25 until Dec. 23, in confirming the broader S&P 500. The cumulative advance/decline line on the
reached its post-October 1998 high on May 13, 1999, and has been declining steadily toward new lows ever since.
The Dow Theory made sense fundamentally: If you make it, you've got to ship it. Transportation stocks, principally railroads in Dow's day, tended to be the leading indicators of general economic activity. Utilities, protected by regulation and cost-plus pricing of their services, paid generous dividends to their risk-averse shareholders and were seen as a barometer of interest-rate changes. And as recently as the 1993 to 1994 market cycle, we could see the utilities index behaving as the miner's canary of interest-rate increases.
Use of Utilities
The utilities index peaked in September 1993 and 10-year notes in October 1993, but the transportation and industrial averages did not peak until February 1994, days before the
embarked upon its course of seven interest-rate increases. While these two averages confirmed each other, the upward course of interest rates put equities into a trading range until November 1994.
Maybe It's Different This Time
We haven't, however, repealed the laws of finance or human nature (or the law of gravity, for that matter). What may in fact be different this time -- and that phrase has an ominous "famous last words" quality -- is the nature of the underlying economy. The utilities index has not led interest rates higher in this market; utilities are no longer a completely regulated industry. Both the natural-gas and electric-utility segments have been undergoing wrenching changes to competitive markets, and therefore their stocks can no longer be treated as surrogate bonds.
To a certain extent, the transportation group has been penalized by rising fuel prices throughout 1999, but that may be masking a longer-term fundamental shift. To the extent we are shipping bits of information rather than atoms of goods, our new transportation barometer should be weighted toward telecommunications and Internet stocks.
On the off chance it has escaped your attention, these stocks have been leaping toward new highs, not just in the U.S., but throughout what passes for the civilized world. Substitute the
index or the
Inter@ctive Week Internet
index -- up 92.27% and 158.82%, respectively, on the year through Dec. 23 --for the Dow Jones transportation index, and the confirmation problem disappears.
Viewed in this light, companies such as
, key providers of Internet infrastructure, are really in the transportation business.
This does not suggest we ignore movers of atoms, such as railroads, airlines, pipelines and trucking firms; no matter how high-tech we get, somebody, somewhere will need to make and ship stuff.
Good old stuff. A year ago, many pundits, present company included, thought
United Parcel Service
would be the ultimate beneficiaries of e-commerce. FDX stock nearly tripled between October 1998 and May 1999, only to lose a third of its value since.
What happened? Rising fuel costs outweighed strong international growth and drove earnings down 6.6% in the most recent quarter from a year ago. The company is now embarking on a fuel-hedging program, proving once again that commodity risk management matters, absolutely and positively.
That's quite a thought as our New Economy moves into the new millennium.
Howard L. Simons is a professor of finance at the Illinois Institute of Technology, a trading consultant and the author of The Dynamic Option Selection System (John Wiley & Sons, 1999). At time of publication, Simons held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Simons appreciates your feedback at