New High in DOW is Meaningless
There was dancing in the streets, well, at least on the floor of the New York Stock Exchange last week when the Dow Jones Industrial Index closed at an all time high. The many cheerleaders on CNBC-TV were ecstatic screaming, “I told you so”. But what did it really tell us. The DJIA or DOW as it is also called is composed of 30 stocks that actually represent about 25% of the value of the NYSE. That is very impressive and one of the main reasons this index is watched by so many the world over. Caterpillar Tractor Company was $16 in the year 2000 and closed on October 2, 2006 at $65. The worst was Intel that dropped from $72 to $20. Many fell 50%. So what really happened? Only 9 of the 30 stocks made new highs that day – only 30%. No one on CNBC bothered to mention 21 stocks, 70%, failed to participate. New highs were entered by American Express +3 points, Boeing +12, Caterpillar +49, Johnson & Johnson +30, Minnesota Mining & Manufacturing (MMM) + 33, Altria +55, Proctor & Gamble + 4, United Technology + 39 and Exxon + 25. There is no point in listing all the losers. Three lost more than 50% from the 2000 high. How can this make a new meaningful high when the index shows 70% of the stockholders lost money? Way back when before you were a gleam in Daddy’s eye (1896) when the original average created by Mr. Dow and Mr. Jones first appeared in the Wall Street Journal all you did was add up the price of all the stocks and divide to get the Index. Stocks went up and dividends were issued and those darn stock splits played havoc with computing what the average was each day. There is no point in going into the complex details, but let’s look at how they get to the final index number. Each stock in 1990 was added and multiplied by 2. Today each stock is added and multiplied by 8 to get the DOW number. If you add the closing prices of the DJIA stocks on October 3 it came to 1465.91. With the current multiplier of 8 makes a closing DOW Index of 11,727. A new high. Not really. Every investor is encouraged to go on the Internet to www.bigcharts.com to look at a 10-year history of each of the 30 stocks. A comparison to the DJIA may be superimposed. It will shock most investors. Don’t buy stock based on what the DOW is doing. You must do your own research for each issue before parting with your money. Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved. |
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