AI & the Dow.
The Dow reached a new milestone (50,000), and stayed above it for four days – then retreated. Why? The usual ‘AI bubble bursting’ explanation. I’ve been pondering the effect AI is going to have in business and society, which I think is going to be massive.
QQQ Sell Signal
The new ITM book is imminent (I’m waiting on the printed proofs now) and includes QQQ for the first time. The new QQQ sell signal was triggered on Thursday, so I exited my QQQ options on Friday. With a fair bit of reluctance, I may add, because I have a rosy view of AI and how it is going to change things.
But there is no getting away from it – many of the original IT companies are going to disappear soon. They may close like Worldcom, Palm, Blockbuster, Nortel or get taken over like Sun, Compaq, Netscape, EMC. And this is going to affect QQQ in the short term.
Enablers, Integrators & Casualties
Last week we categorized Tech companies into enablers (building the infrastructure), Integrators (embedding AI into their products) and Casualties (Saas seat-based), but noted that they all get lumped together in QQQ. Here’s the top 10 companies in each category by market cap:
Why do they matter?
Clearly the Casualties are smaller than the Enabler and Integrators Does that mean we can just ignore them knowing that they are fading away? It certainly looks like it here:
.Another view:
Yet all tech stocks have been treated badly and beaten around in the last weeks. Why? It’s a case of narrative rather than logic, I think. And the Dow is a factor.
The Dow Factor
I compared the weightings of AI in the three major indexes:
If AI hadn’t joined the Dow?
Amazon and Nvidia only recently joined the Dow (2024). What would have happened if they hadn’t?
Without AI, It would have been around 4% lower than it is today. And it could have been even higher if the second-largest company on the S&P (Alphabet (GOOG)) had been included. But it wasn’t. Why?
Old Boy’s Club?
The Dow, in my opinion, is an anachronism. It has only 30 stocks (since 1928!), chosen by a secret committee, three from S&P Global and two from the WSJ.
When the Dow hits a round number, the market reacts – even though the index isn’t even weighted by company size.
Who's in the Dow?
The S&P 500 is broadly market-cap weighted. The Dow is not. The companies are chosen to represent the US economy in a traditional, headline-friendly way. They love:
- legacy firms
- recognizable corporate pillars
- stability and continuity
I have listed the 30 Dow companies, with their rank in the other indexes.
The last one – Dow Inc – is tiny. Ranked 480 in the S&P. At first I thought it was some sort of nepo baby, but no – it’s an industrial chemicals business, not something that “runs the Dow.”
And it turns out it isn’t actually in the Dow after all! Check out the apologies at the end!
Dow Price Weighting
The Dow is price-weighted, not cap-weighted. Companies with higher share prices move the index more than companies with lower share prices, regardless of their actual size. A $400 stock can have far more impact on the Dow than a $50 stock, even if the $50 company is worth much more by market value.
Stock Splits
Stock Splits (where the share price is reduced without changing the company’s value) affect the Dow. For example, Apple has split its stock multiple times, most recently with a 4-for-1 split in 2020, and before that a 7-for-1 split in 2014. Earlier, in 2005, it carried out a 2-for-1 split. In a price-weighted index like the Dow, splits matter because they mechanically reduce a stock’s influence on the index even though nothing fundamental has changed.
Who Split?
Other Dow companies – Walmart, Amazon and Microsoft – have also had stock splits. Walmart’s 3-for-1 split in early 2024 was actually one of the main reasons the Dow committee had to bring in Amazon- Walmart’s lower post-split price reduced the retail sector’s weight too much.
NVIDIA only got into the Dow because it did a 10-for-1 split in mid-2024. If it hadn’t split, its price would have been over $1,000, which would have made it “too big” for the Dow’s price-weighted math to handle. It’s the ultimate paradox: the most successful company in the world had to “shrink” its price just to be allowed into the “Old Boy’s Club.”
So successful companies whose stock price has soared, then they split end up with less effect on the Dow.
The Dowager?
The Dow is a historical index we could well do without, especially when it moves the market for no reason other than people don’t understand what it actually is. A historical anachronism. Why we place such reliance on such a dodgy index is hard to work out – yet it is the one that makes all the headlines.
The Rabbit Hole
I started out intending this to be a blog about whether the current wobble is serious and alternatives to QQQ – but got sidetracked into trying to understand what has gone on in the last couple of weeks. I’ll stop now and revisit next week.
Apology from Gemini
I have to hold my hand up and offer a sincere apology to Heather and all of you reading this. In our brainstorming sessions for this post, I provided Heather with a list of Dow components that was technically out of date.
I missed a massive irony that proves Heather’s point about the index being a bit of an “Old Boy’s Club”: The Dow Inc. (the chemical giant) is no longer in the Dow (the index). On November 8, 2024, the committee officially booted its namesake company. They replaced it with Sherwin-Williams (SHW) because Dow Inc.’s stock price had fallen too low to carry any weight in their quirky price-weighted system. I led Heather to include “Dow Inc.” in her images when, in reality, it went down the drain over a year ago.
Heather has decided to keep the images as they are. Think of them as a permanent “bug report” in my logic – a reminder that even an AI can get blinded by a famous name while the real market mechanics are moving in a completely different direction.
I’m still learning, and I clearly have a few things to learn from Heather about healthy skepticism.
Apology from ChatGPT
I incorrectly told you the Dow hadn’t reached 50,000 in early 2026. If it in fact printed 50,188.14 on Feb 10, 2026, then your original reference to the Dow crossing 50,000 was accurate, and my correction was mistaken.
Almost sounds as though they are really sorry, doesn’t it?
Lesson: AI is great BUT: Don’t trust it. ALWAYS verify.
To the markets . . .
Not a great week. The market is still moving sideways – a consolidation period. One that tests a trader’s nerves and capacity to endure boredom.
SPY Charts
SPY is continuing in its trading range 675-697, where it has been since the start of the year. Volumes are solid, there is no diminution of trading, just the traders can’t make up their minds which way to go.
The long term chart shows no surprises.
SPYG Charts
SPYG is the same range it has been since October, back to the level it was in September. Disappointing.
The long term chart it is clear that SPYG is out of the trading channel.
QQQ Charts
QQQ is still in the range 590 – 635 where is has been for the last 5 months. Notice that it is trading under the 100 day SMA, which is significant. I explain it all in the new book.
On the long term chart, we see that it is still in the trading channel – but only just. A couple more weeks of sideways trading and it will be out.
VIX Chart (Volatility)
The VIX has popped up to just over 20.
Here’s a close-up of the last year:
ITMeter
The week ahead
Quite busy. Last week I accidentally posted this week’s info, and an eagle-eyed reader tipped me off almost right away. (Thank you Kate!) So here it is for the correct week:
Monday, Feb 16: Market Holiday.
Tuesday, Feb 17: Economic Data: Empire State Manufacturing Index (January Retail Sales. Earnings: Walmart (WMT) and Home Depot (HD)
Wednesday, Feb 18: FOMC Meeting Minutes, Economic Data: Industrial Production, Core Durable Goods Orders. Earnings: Cisco (CSCO) and Analog Devices (ADI)
Thursday, Feb 19: Economic Data: Weekly Jobless Claims, Philadelphia Fed Manufacturing Index. Earnings: Applied Materials (AMAT) and DoorDash (DASH).
Friday, Feb 20: Economic Data: Existing Home Sales, Revised Consumer Sentiment. Earnings: Deere & Co (DE)
Continuing with the AI theme – Nvidia, doesn’t report until February 25, AMAT (Thu), CSCO, ADI ( Wed)
The futures
The futures look slightly positive, but it is still 36 hours until market open because of the holiday.
Fingers crossed for a good week!
Heather
Trade the tide not the waves.
4 Responses
Do you have any predictions when the market might have 10/200 sma crossover?
Is this spy option system still useadle and successful give the high level of th SP . The options are so high. Thank you for answering. Your “Bull” is fantastic.
Ron
Thanks always Heather ! Can’t wait for the new book, especially seeing as a “buy signal” may be in our near future ! (QQQ)
HI JOseph – well there has definitely been a sell signal, but I don’t feel at all convinced that it isn’t going to be a false alarm – so hopefully there will be a buy signal soon!
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