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A hidden bear market in Dow threatens all stocks
The Dow Jones Industrial Average has a hidden bear market going.
A third of the members of the blue chip barometer have hit new 52-week lows this year. By no coincidence, the Dow briefly turned negative for 2015 Tuesday.
"If you had a healthy market, all 30 stocks should be at highs," said Brad Lamensdorf, co-portfolio manager of the Ranger Equity Bear Fund (NYSE Arca: HDGE) (HDGE), which bets against stocks.
Since December 2014, about 10 of the 30 blue chips have hit those bottom levels. The laggards include the commodity-related names Exxon Mobil (NYSE: XOM), Caterpillar (NYSE: CAT) and Chevron (NYSE: CVX), as well as broader market stocks such as American Express (NYSE: AXP), IBM (NYSE: IBM), General Electric (NYSE: GE), McDonald's (NYSE: MCD), Verizon (NYSE: VZ) and AT&T (NYSE: T).
Other blue chips haven't hit new lows yet, but are approaching them. Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), Merck (NYSE: MRK) and Johnson & Johnson (NYSE: JNJ) are less than 10 percent above their 52-week lows. More than half of the Dow is negative year-to-date, with Intel (NASDAQ: INTC) the worst performing, down nearly 16 percent.
The large number of 52-week lows diverges with overall market optimism, Lamensdorf said.
"Right now everyone is very, very bullish and that concerns us," he said, citing a study by Chartcraft that showed bullish sentiment among 150 financial market newsletter writers is approaching 30-year highs.
The strong dollar will likely pressure blue chips, as the Dow is skewed towards multinationals and their goods are getting more expensive every day overseas.
The U.S. dollar is already up more than 10 percent year-to-date, extending last year's gain of 14 percent.
"The currency translation impacts on U.S. multinational corporate earnings are going to be worse on actual first-quarter 2015 bottom lines and subsequent estimate revisions than it was during fourth-quarter 2014 earnings season," Earnings Scout CEO Nick Raich wrote in a note last week.
The strong dollar weighs particularly on the Dow components needed to send the index higher, analyst Nicholas Colas said in a Convergex Execution Solutions report.
The March 12 study showed that in order for the Dow to rise, the index needs a combined 30 percent boost from Visa (NYSE: V), Goldman Sachs (NYSE: GS), 3M (NYSE: MMM), IBM and United Technologies (NYSE: UTX)-all multinationals that will likely suffer from a strong dollar .
Indeed, in its fourth-quarter conference call in late January, IBM cited FX headwinds as "the difference between growing pretax income and not growing pretax income in the fourth quarter for us."
Several other analysts are expecting a downturn.
"I think whatever happens... with the Fed, the market is still headed to a technical correction based on the fact that we're going to see more and more companies lower their earnings forecast," said Peter Cardillo, chief market economist at Rockwell Global Capital. "That's a viewpoint that suggests companies are going to have to adjust and that will come in the form of a technical pullback."
He expects a decline of 8 to 10 percent in the next few weeks before stocks recover.
"The path of least resistance at this moment seems to be down," said Maris Ogg, president of Tower Bridge Advisors. I "wouldn't be surprised to see a 5 to 10 percent decline in the next few months."
The stocks holding up the Dow so far are the lower-weighted Boeing (NYSE: BA), UnitedHealth (NYSE: UNH), Disney (NYSE: DIS), Home Depot (NYSE: HD) and DuPont (NYSE: DD), Convergex's Colas said.
And if market bulls hope Apple (NASDAQ: AAPL) joining the Dow might change the dynamic, the top market-cap stock will not have as much oomph in the price-weighted index.
"Even if Apple had been in the Dow all this year, the Dow's return would still be negative," the study said.
When Apple replaces AT&T in the Dow after Wednesday's close and Visa implements a 4-for-1 stock split, Goldman Sachs will take over the top weighting position, followed by 3M, IBM and Boeing. Apple will take the fifth position, while Visa will fall from first to 21st, as of last week's prices.
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