The New York Stock Exchange (NYSE) Financial Index ($NFA)
The NYSE financial index consists of more than 900 banks, brokerage houses, savings and loan institutions, insurance companies, and other financial corporations. Top financial institutions such as Citigroup Inc., American International Group, Morgan Stanley Corp., Bank of America, and Wells Fargo are among the index's components. The index is designed to track the performance of the major and most widely traded financial stocks in the New York Stock Exchange.
A market truism suggests that there can be no bull market in the modern capitalist system without the participation of the "financials," and the performance of the NYSE financial index since late 2000 seems to testify to that fact. While the broader market has remained in a secular bear market, every meaningful bear market rally in stocks in general has been accompanied by an even sharper rally in financial stocks. Most notable of these bear market rallies in the financials are those beginning in March 2001, September 2001, July 2002, and most recent, October 2002.
What they say: "Since 2000, the finance sector has significantly outperformed the stock market, which at the time was heavily overweighted by high-tech and telecommunications stocks. This outperformance didn't only take place in the United States, but also in Europe (until 2002), in Asia ex Japan, and particularly, in Hong Kong." - Marc Faber, editor of "The Gloom, Boom and Doom Report." From www.dailyreckoning.com, December 2002.
Dow Jones Utilities Average ($DJU)
The newest of the three main Dow Jones averages, the Dow Jones utilities average has the dubious distinction of being founded in the same year as the great stock market crash of 1929. The DJU consists of 15 companies that are leaders in the field of procuring, developing, and distributing water, gas, and electric services. Many of these corporations have expanded their activities to include energy trading, some to their great benefit (American Electric Power), and others to their great detriment (Enron). Deregulation of the utilities industry perhaps has been the most significant macroeconomic challenge to utilities companies since the Dow Jones utilities average was founded.
Once considered a safe investment haven in times of economic stress because of its steady sources of income and reliable dividends, the utilities industry - as represented by the DJUA - has been in a serious bear market since topping out in late 2000. With losses of over 50% in the past two years, those investing in utilities stocks have had to be particularly careful - if not nimble - in their selections in order to avoid what have been in many cases crushing losses.
What they say: "Utilities have to buy power and/or natural gas in the open market. They're not going to be able to pass on 100% of any cost increase to their customers. Even those in a very friendly regulatory environment won't be able to raise rates by 400% or 500%." - Jon Cartwright, senior power and energy analyst, Raymond James. From www.thestreet.com, October 2002.
The Philadelphia Semiconductor Index ($SOXX)
The Philadelphia semiconductor index is a widely followed barometer of 16 US companies involved in the development, manufacture, and sale of semiconductors. As the index of "chips" stocks, the Philadelphia semiconductor index is also used as a general measure of the health of the technology industry.
The primary beneficiary of the stock market's rise in the second half of the 1990s, semiconductor stocks were among the primary casualties of the secular bear market in stocks that began in 2000. After holding their own in a trading range from September 2000 to March 2002 immediately following the market crash in the spring of 2000, semiconductor stocks sank beneath that range in the second half of 2002.
What they say: "Almost unthinkable just six months ago, the tech-heavy NASDAQ is sinking dangerously close to the three-digit precipice. On September 23, it hit 1,184 - a level not seen since September 1996, just two months before Federal Reserve chairman Alan Greenspan made his infamous 'irrational exuberance' speech. So let's make it official: The age of irrational exuberance is over. Clang!" - Eric Hellweg, CNN/Money contributing columnist. From money.ccn.com, September 2002.
Dow Jones Transportation Average ($DJT)
The Dow Jones transportation average is actually the oldest of the three main Dow Jones averages (the other two are the industrials and the utilities). The $DJT, which initially consisted of the major railroads of the day (the last decade and a half of the 19th century), is currently made up of 20 price-weighted (as opposed to market capitalization?weighted) US companies representing commercial airlines, air freight, trucking, and railroad interests.
The transports, as they are called, are a major component of Dow theory methodology, which is an approach to anticipating both market direction and economic strength or weakness based on a comparison of price action between the Dow Jones transportation average and the industrial average. Alone, the transports are worth watching for their sensitivity to perceptions of economic change. Note in particular the sharpness with which the transports have rallied in the wake of the various bear market troughs since 2001. The strength of the transports rallying from the most recent lows in October 2002 helped underscore the confidence many investors had in the autumn rally.
What they say: "The surprise in United Airlines' likely bankruptcy drama isn't that it faces such unpleasant options-it's that it didn't face them sooner. The airline's business plan, dismissed by the government's Air Transportation Stabilization Board, is not much worse than any of its competitors. Almost every major US carrier faces the same dire choices." - Jon Bonne, MSNBC correspondent. From www.msnbc.com, December 2002.
Originally published in the February 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.