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The Dow Jones Industrial Average ($INDU) has enjoyed a five-day winning streak that has helped push the 111-year old index beyond the psychologically important 14,000 level. Some market watchers view the Dow’s moves to new highs as a sign that the bull market in the US stock market is alive in well. Interestingly, however, the recent gains have occurred without much good news from the components of the industrial average.   

Charles Dow would probably be surprised to hear that his industrial average reached the 14,000 level today. He’s not alive to share in the excitement, but Dow would be astonished to see how much higher the average is today compared to 1896 when the index was originally published. At that time, the industrial average included 9 companies. Today, the number has been expanded to 30.

Johnson & Johnson (JNJ) and Coca Cola (KO) are two members of the Dow Jones Industrial Average. It’s not entirely clear why they are included within an “industrial” average since one makes pharmaceuticals and the other makes soft drinks, but both companies are indeed Dow stocks. Both also reported earnings on Tuesday and shares of both companies fell on the news. JNJ lost $1.06, or 1.66%, to $62.74 and KO fell 68 cents, or 1.26%, to $53.17.

Yet, despite disappointing reaction to the earnings news, the industrial average powered higher in morning trading and briefly topped the 14,000 level. How is this so? Well, it seems that analysts at Goldman Sachs have a bullish view on American Express (AXP), another component of the industrial average. According to the firm, AXP is no longer a “neutral”, but a “buy”. Although the exact reasons for the newfound bullishness is unclear (something about an undervalued network business???), the upbeat comments were enough to drive shares of American Express up $2.86, or 4.6%, higher to a one-month high of $64.74 a share. The big move was largely responsible for the 21-point gain in the industrial average on Tuesday.

On Monday, the Dow got a lift from, not earnings news, but merger speculation. Verizon Wireless (VZ) was the best gainer in the industrial average after the Financial Times web site reported that Vodaphone (VOD) is considering a bid for the company. Although Vodaphone vehemently denies the speculation, Verizon shares rose nevertheless.  VZ rose $1.00 to $42.76 and were a big help to the Dow, which closed up 44 points on Monday.

The industrial average posted a similar gain on Friday, when General Electric (GE) reported profits of 53 cents a share, which beat expectations by a full penny. GE also announced that it has increased its share buyback from $12 billion to $14 billion, or an increase of $2 billion. While $2 billion in GE shares represents less than .005% of the company’s total market value, the share price is up 4.4% since the news was announced. In short, GE’s share buyback announcement seems to be another big reason for the Dow’s recent ascent to new highs.

Alcoa (AA) also helped. Shares of the aluminum maker rallied $2.86, or 6.74%, last Thursday after a merger was announced. Although the takeover didn’t involve Alcoa, but rival Alcan (AL), investors cheered the news and drove shares of Alcoa sharply higher. It appears that many players believe that an announcement is imminent, although nothing new has happened since Alcan was taken out last Thursday. 

In sum, the Dow has enjoyed a five-day winning streak that momentarily pushed it above 14,000 on Tuesday. Alcoa jump-started the rally on Thursday when one of its rivals was bought out and that fueled speculation that Alcoa might now be in play. GE is up more than 4% since last Friday when it posted earnings that beat by a penny and announced that it was buying back a little bit more of its 10,200,000,000 shares outstanding. Monday, the Dow got a boost from speculation Vodaphone was buying Verizon, which Vodaphone also denied. Then, on Tuesday, Goldman Sachs helped the Dow push beyond the 14,000 level after saying nice things about American Express. Basically, it doesn’t appear that fundamentals are really driving the Dow’s latest move higher. Instead, it seems to be hopes, dreams, speculation and maybe a little “painting of the tape” heading into this week’s options expiration.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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