Beware of the Dow Jones Industrial Average Lead Rally

This morning, most of the leading stocks in the Dow Jones Industrial Average (DJIA) are trading higher. Traders must remember that the DJIA is a price cap weighted index unlike the S&P 500 Index and NASDAQ Composite which are market cap weighted indexes. When a price cap weighted index trades higher it will usually signal that the high priced stocks in that indexes are trading higher. Today, International Business Machines Corp (NYSE:IBM) is the highest priced stock in the DJIA and carries the most weight. This tech giant is trading higher by $1.54 to $204.40 a share. Chevron Corp (NYSE:CVX) is the second largest stock in the DJIA by price capitalization. This leading energy stock is trading higher by $1.01 to $101.79 a share. Just between IBM, and CVX it will likely account for large percentage of the move in the DJIA. Some other large weightings in the DJIA are Caterpillar Inc (NYSE:CAT), 3M Co (NYSE:MMM), and Exxon Mobil Corp (NYSE:XOM).

Traders should all beware when the DJIA leads the major stock indexes higher. Often, large investors will park money in the DJIA to collect a dividend if growth stocks look to be slowing down. Remember, it does not take many stocks in the DJIA to have the index trade into positive territory; it only takes a handful of the high priced stocks in the index to trade higher.

About Nicholas Santiago 575 Articles


Nicholas Santiago started trading in 1991. In 1997, he became a licensed Series 7 and 63 registered representative. He managed money for a large, affluent private client group. After applying his knowledge to his client base, he decided it was time to begin teaching those interested in learning his methods. He is an expert in Technical Analysis. He has become an accomplished technician in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. In 2007, he partnered with Gareth Soloway to form InTheMoneyStocks.Com and realize his dream of educating others about the truth of the markets.

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