The Dow Jones Industrial Average (DJIA) has finally hit the 17,000 mark! This is after new highs have been hit many times in 2014. Though 17,000 may not be a significantly important reading on a true technical analysis level, it is a key psychological hurdle that will only help investors at the retail level. Now it is time consider what can get to the DJIA not just to 18,000, but up to 20,000!
The message from 24/7 Wall St. is not one of panic — even if each new milestone brings an opportunity for profit taking. By our reading, DJIA 17,000 seems to be just one of the road bumps along the way to DJIA 20,000. Amazingly, it will only require that 10 or 11 of the 30 DJIA components will take us to DJIA 20,000. Is it possible for only 10 or 11 stocks to rule an entire index? Absolutely!
24/7 Wall St. does not expect DJIA 20,000 to be hit in 2014, and maybe not even before the end of 2015. What investors need to consider is that DJIA 20,000 is only 17.6% higher. As long as a sensible market occurs, even with corrections here and there, the Dow 20,000 level might be expected as soon as the end of 2015 or the early part of 2016. In this light, we have created a key DJIA analysis on a stock-by-stock basis.
As to why the index growth only needs 10 stocks or so to rally to 20,000, the DJIA is weighted in an old-fashion price-weighted calculation. A $200 share price for a DJIA stock is worth four times that of a $50 stock, even if that $50 stock is worth 10 times more in the market capitalization than the $200 stock. If it just boils down to a stock price, then about a third of the 30 DJIA stocks matter.
IndexArb.com projected as of Thursday that the top 10 DJIA components by index weighting (again, those with the highest share prices) account for 53.16% of the entire DJIA. The top five components also account for 31.99% of the index. In fact, the top 15 of 30 DJIA stocks by weighting account for 70.54% of the entire index, and the bottom five DJIA stocks only account for less than 6% of the entire index weighting.
Don’t get tricked into thinking this is wild euphoria. Getting the DJIA to 20,000 of course implies that the bull market continues. Should you expect corrections along the way? Absolutely, even if we have yet to have a meaningful stock market correction in far too long now. There is a saying that goes “Bull markets climb a wall of worry.” It is true, but we just have not had a 5% or 10% stock market correction in too long to easily count. This forces investors in when they don’t feel like they are getting to buy on a bargain.
This bullish case will also require that U.S. gross domestic product (GDP) growth resumes in 2014. Furthermore, it requires that the global GDP story recovers into 2015 and into 2016. In short, that quantitative easing in Europe and Japan make gains, and that growth policies in China and India are allowed to continue. Also keep in mind that the 17,000 hurdle was on the back of the best jobs report from the Labor Department since back in 2008.
24/7 Wall St. has provided a bullish case using the highest analyst price targets from Thomson Reuters to see how high the DJIA can go. After looking this over, DJIA 20,000 looks realistic. We have also included a synopsis of what will drive each stock.