Coming Soon: New All-time Highs for the Dow

October 1, 2006

The Dow Jones Industrial Average has come up short in recent attempts to notch all-time highs, but the blue-chip index will likely stake claim to new records soon.

The venerable 30-company Dow Jones Industrial Average (DJIA) has finally come close to reclaiming glory following a multitude of turmoil including a bursting internet bubble, the ensuing economic recession, and terrorist attacks. The significance of new heights is merely psychological – but could provide the impetus for further upside to the market.

Other indexes like the Nasdaq have a long way to go before they can boast record highs. From its current value of 2,258 the index is not even halfway to its high of over 5,000 points set in March 2000. This huge gap represents the difference between investing in large established companies rather than smaller speculative stocks.

The Dow currently stands at 11,679 – just 44 points shy from its all-time closing high of 11,722.98 set on January 14, 2000. Trading on Monday marks the beginning of the seasonally strong fourth quarter, following an exceptional third quarter. Investors will need one more reassuring economic indicator to allow stocks to surge over the current threshold. Friday’s employment report is the most vital, but Monday’s construction and manufacturing reports could play an important role as well. Unexpected events like a Fed chairman commenting on inflation or offering an interest rate outlook will also give direction to stocks.

Earnings reports do not begin rolling in until two weeks from now – but so far things have remained strong on this end. Nothing is holding the market back other than investor psychology. Many are unwilling to make bold moves without reassurance that things indeed are headed upwards.

One potentially problematic piece of the Dow is Hewlett-Packard (HPQ), which has been roiled by a boardroom scandal. The stock dropped significantly as initial reports of the drama were released, but has recouped most of its losses since. Should any further negativity come out of the company, the Dow record may be delayed.

The value of the Dow is calculated by the dollar-value of the stocks it is made up of. Thus, a $1 move on $63 priced United Technologie (UTX), would have the same effect as a $1 move for $37 HP. A one percent drop in United Tech would cause the Dow to lose twice as much as it would from a one percent HP drop. Percentage-wise, United Tech wields almost twice the amount of power HP does and can move the index accordingly.

Other Dow components including Intel (INTC) and General Motors (GM) have performed strongly. GM is up on hopes that its turnaround plan is showing promising signs. Intel investors are anticipating strong demand for its products during the holiday season and realizing the underlying value of the security. The combination of these strong sentiments will bode well for the market.

Expect the Dow to reach uncharted territory within the next two weeks, with a push from the first positive piece of economic news. The market remains strong and should manage to march on higher in the coming weeks as it has in the past. There is simply too much value in securities that has to be realized at some point.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.