Dow 20,000 Percentages; Materials Sector Assumes Leadership

The market has been on Dow 20,000 watch for a couple of months now, and today, it finally got what it was looking for. The Dow Jones Industrial Average printed its first value above 20,000 within seconds of the market open this morning. If you happened to catch a view of the NYSE trading floor today, then you might be of the belief that floor traders were primarliy interested in a new hat. With Dow 20,000 now in the history books, it is time for Dow 21,000 watch.

The financial media seems to obsess about the Dow’s crossing of every 1,000-point threshold, making it out to be as significant as the previous one. However, each successive 1,000-point gain is less notable than all the preceding ones. It keeps becoming less impressive every time it happens. When the Dow Jones Industrial Average went from 1,000 to 2,000, it was indeed a significant event, as that 1,000-point move represented a doubling of value—a full 100% gain. It took the Dow more than 14 years to accomplish that particular 1,000-point rise. The journey that commenced in November 1972 and lasted until January 1987 also included a few bear markets. If that wasn’t enough, the market was on Dow 1,000 watch for the eight years leading up to 1972, as the Dow closed above 990, but shy of 1,000, on nine separate occasions in 1966.

The Dow’s first close above 19,000 occurred on November 22 of last year. That’s right. It took the venerable index only 42 market days to check off this most recent 1,000-point threshold. Unlike the others that came before, this particular accomplishment required only a 5.26% move. The upcoming move to 21,000 will require only a 5.0% increase. It is entirely possible for the Dow to climb more than 5% in a week—it has done so twice in the past 25 months. So new hats are feasible next week.

The absurdity of focusing on points instead of percentage gains becomes apparent when comparing logarithmic price charts to linear ones. Using the past 100 years of the Dow as an example, the accompanying graphic depicts the Dow in a logarithmic fashion in the upper half, and uses a linear scale in the lower half. Both are accurate, but only one lets you clearly see what has happened the past 100 years.

Most investors are more familiar with linear charts, despite their inherent visual flaws. Much like the media, the linear chart in the lower half treats each 1,000-point gain the same, and the vertical distance between 0 and 10,000 is the same as between 10,000 and 20,000.

Meanwhile, the logarithmic chart in the upper half treats each percentage gain the same. Therefore, the vertical distance between 1,000 and 2,000 is the same as the distance between 5,000 and 10,000 because each represents a 100% gain. As an investor, you know it is the percentage gain that counts—not the points.

As I mentioned earlier, both charts are accurate, but the way humans visually process information can easily distort long-term data when viewed on a linear chart. Here are some examples of the visible problems and distortions of the linear chart in the lower half:

  • The 15% correction of 2015 looks larger than the 35% bear market of 1987.
  • The devastating bear market of the Great Depression is not even visible.
  • The majority of the Dow’s 100-year gains appear to have occurred since 2009, when actually only a small portion has occurred since then.
  • It appears nothing happened from 1916 to 1986.

Although investors may not be comfortable with the vertical scaling numbers used on logarithmic charts, your brain can process the displayed data more accurately. Therefore, it is imperative that you take the time to become comfortable with them. Let your brain process the visual information, and let the actual numbers of the vertical scale become less significant.

The Materials ETF has avoided the financial headlines and quietly assumed the market’s sector leadership. It has more than doubled the performance of the S&P 500 over the past year, suggesting some sustainability of the move. Latin America returns to the top of the global rankings after a 10-week absence.

Sectors: Materials climbed two places higher to assume the sector leadership role. Even though Materials has been in the top half of the rankings for all but one of the past 15 weeks, most investors have overlooked its strength. Its relative strength dates back a full year, as the Vanguard Materials ETF (VAW) has surged 49%, more than doubling the 24% return of the SPDR S&P 500 ETF (SPY). The dethroned Financials sector is now in second place, following its 10-week reign at the top. Technology also climbed a notch, helping to push Telecom from second down to fourth. In the lower half, Real Estate and Energy swapped places, and Consumer Staples climbed off the bottom. The defensive sectors are still huddled at the lower extremity, with Utilities and Health Care each slipping lower. The Vanguard Health Care ETF (VHT) has been unable to establish a new high in the past 16 months, has lost about 7% of its value in the past six months, and is now the only one of our sector benchmark ETFs registering negative momentum.

Factors: For the second week in a row, all but two of the factor benchmark ETFs posted momentum declines. Growth and Momentum were the two exceptions this week, although they both remain low in the relative-strength rankings. None of the top five factors has budged from their positions for six consecutive weeks. High Beta has been the only occupant of the #1 slot since the introduction of the Factor Edge 14 weeks ago. Growth was the only factor to climb in the rankings this week, moving from 10th to seventh. Its rise pushed Quality, Momentum, and Low Volatility all lower, while Yield remains on the bottom.

Global: Latin America returns to the top of the heap. It held that position 11 weeks ago, but the post-election leadership shift temporarily sent it all the way to the bottom. Apparently, much of the previous selling was a knee-jerk reaction that has now reversed itself. Strength in the Materials sector is also playing a role, as the other two resource-rich categories of Canada and Pacific ex-Japan are ranked second and fourth, respectively. Emerging Markets ascended three spots thanks to the extra pull from Latin America. The U.S. slipped again, this week falling two places to eighth. Even though market participants are celebrating Dow 20,000 today, most markets outside the U.S. are performing even better. Japan fell one spot lower, replacing China on the bottom. However, Japan is still posting a double-digit momentum score, so it is not in trouble—it is just lagging that of the rest of the world. Currency swings have been a big contributor to the performance of the iShares MSCI Japan ETF (EWJ), and for the past five months, those contributions have been primarily negative ones.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“Don’t tell your problems to people: eighty percent don’t care;
and the other twenty percent are glad you have them.”

—Lou Holtz, football coach

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