Stock Indexes – the Long View

Here is some material to consider. Have a look at these arithmetic scale 30 year charts, monthly closing basis, of the Dow Industrials, S&P 500 and NASDAQ 100.

(click on each chart to enlarge)

Now, a reader may note that on such a long time line, we should be looking at a logarithmic scale, but bear with me for a moment.

What do you see here? I see each of these three major stock indexes saying something rather different:

Dow – possible head and shoulders top forming

SPX – double top has already formed

NDX – slowly recovering from a huge spike

Why so different? It’s the parabolic spike in the NDX from 1998 – 2000 driven by the tech mania and Y2K scare. In particular, consider the difference between the Dow and SPX, which typically are highly correlated – the R squared is in the high 90s.

The SPX, containing a higher proportion of large cap tech stocks, rose faster and fell harder than the relatively conservatively constituted Dow during the tech bubble and bust. Could we say then, that the long term price pattern of the SPX is more “distorted” by the tech mania than the Dow?

Following on that, which is the more valid long term chart pattern for analytical purposes: the head and shoulders or the double top? Does it matter, since both patterns are normally bearish? Possibly yes, as the Dow is now in the range of resistance at 11K where it’s forming the right shoulder.

Another question: does the NDX, having already had its monumental crash, look like the most constructive of the charts post Y2K? Doesn’t it make sense, as it includes more growth companies, and fewer of the old economy and financial firms that were hammered in the financial crisis?

So, what is your investment stance? Which charts are you looking at?

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