So Goes IBM, So Goes The Market
We had a real divergence in the market today, the S&P500 beat the Dow Jones Industrials (DOW) by more than 3/4ths of one percent (0.80%). Almost all of the this divergence can be attributed to IBM which was down over 8%, after a poor earnings report.
As I mentioned in this previous article, Why The DOW is Outperforming, a stock like IBM has outsized weight simply because of its high price (in absolute value). The DJIA is a price weighted index and not a market weight index.
It’s notable that for many years before other types of indexes came out, the absolute price of a stock was a determination of whether a stock was ‘cheap’ or ‘expensive’. A price weighted index reinforces this misconception. I think many people still today look at stock prices in this way. If you want to invest in individual stocks, this is one of the first things you need to know about stocks.
There was a report sent out on Bloomberg’s chart of the day today that takes IBM’s price movement as a harbinger of future market performance:
According to Paul Hickey, co-founder of Bespoke Investment Group LLC. International Business Machine Corp.’s stock performance today will send a signal about where U.S. shares are headed through Memorial Day.
When IBM’s stock had post-earnings gains, the S&P 500 climbed during the following five weeks and vice versa. Shares of the Armonk, New York-based company and the index moved in the same direction 76 percent of the time since 2003.
Here’s an included chart that covers the last 4 years, which matched 100% of the time.
The reasoning? Dave Wilson, a Bloomberg correspondent, talked on Taking Stock that IBM’s reach across the world and business sectors make it good indicator of where future business is heading. If business is doing well overall, more investment in technology and infrastructure would result which would benefit IBM.
Also, I would add that it doesn’t hurt that fact that IBM itself is large company and has enough influence to move markets, especially in the DJIA due to its huge price weighting in the index.
Chart reprinted from Bloomberg’s Chart Of The Day. Send an email to email@example.com to get the chart/story.