The Dow Jones Industrial Average fails the average investor |

The Dow Jones Industrial Average fails the average investor

Steve Selengut

In addition to a well thought out investment plan, successful equity investing requires a feel for what is going on in the real world that we all refer to as “The Market.”To most investors, the Dow Jones Industrial Average provides all of the information they think they need and they worship it mindlessly, thinking that this time-tattered average has mystical predictive and analytic powers far beyond the scope of any other market number. A cursory review of New York Stock Exchange Issue Breadth figures (93 percent of the Dow stocks are traded there) clearly shows how the Dow has neither been prescient nor historically accurate with regard to broad market movements for the past eight years. Additionally, this financial icon that investors revere as the ultimate Blue Chip Stock Market Indicator has lost its luster, with less than half its members achieving Standard and Poor’s ratings of A or better, and 20 percent of the issues ranked below investment grade.

Is the 120-year-old Dow Jones Industrial Average impotent? No, it’s certainly helpful for peak-to-peak analysis right now, for example, to see if your large-cap-only equity portfolio is as high as it was six years ago. But it’s based upon a seriously flawed buy and hold investment strategy and universally used as a market barometer, when its original role was as an economic indicator. This is not just semantics. It’s Wall Street’s rendition of the emperor’s new clothes. Possibly, a weighted average of investor-perceived business prospects for 30 major companies is a viable economic indicator, but leading or lagging? Clearly, there is no conceivable way that any existing average/index can measure the progress of the thousands of individual securities (and mutual funds masquerading as individual securities) that, in the real investment world, are “The Market.” And is there just a Market, when funds represented by a cacophony of initials of all sorts are all mixed together in such a way that most brokerage firm statements can’t quite distinguish one from the other? Investors are dealing with multiple markets of different types. Markets that don’t follow the same rules or respond to the same changes in the same ways. The Dow is dead, long live reality.Feeling statistically naked? Don’t fret Nell, here are a few real market statistics and lists that are easy to understand, easy to put your cursor on and useful in keeping you up to date on what’s going on in the multiple Markets of today’s Investment World:1. Issue Breadth is the single most accurate barometer of what’s going on in the markets on a daily basis. Statistics for each of the stock exchanges are tracked daily, documenting how many individual issues have advanced versus how many have declined. Rarely are these important numbers reported, especially if they are painting a picture different from that being jammed down investors’ throats by institutional propaganda. Would you believe that in 1999, when the Dow and other indices last achieved all-time-high levels, monthly Issue Breadth on the New York Stock Exchange was positive only in April, followed by a 12-month paper bloodbath extending through May of 2000. Since then, Issue Breadth has been positive for six consecutive years. Surprise!2. Pay close attention to the number of issues hitting new 52-week highs and lows each day: a) for trend corroboration, and b) to obtain a wealth of important information for daily decision-making and periodic performance understanding. The recent New York Stock Exchange bull market (not a typo) is clearly evidenced by six consecutive years, from April 2000, with more issues hitting new 52-week highs than new 52-week lows. New highs nearly tripled new lows. So much for the standard market tracking tools, not to mention Wall Street manipulation of all the news that’s fit to print for investors. Looking at the daily lists of 52-week highs and 52-week lows will help you determine: a) which sectors are moving in which directions, b) if interest rate expectations are pointing up or down, c) which individual issues are approaching either your buy or sell targets and, d) which direction your portfolio Market Value should be moving.In recent months, metals and energy stocks dominated the hot list while regional banks, utilities and other interest rate sensitive issues were notsos (sic). These lists always indicate what’s going on now – without any weighting, charting, or hype – making your job almost simplistic. Take your reasonable profits in the issues that have risen to new peaks (sell higher), and purchase the quality issues among those that are at 52-week lows (buy lower). High prices often reflect high speculation with Bazooka potential, while lower priced value stocks often turn out to be bargains. Ishares, foreign closed end funds, mining and energy bloat today’s 52-week-high list, while preferred shares and utilities occupy the 52-week lows, a bit more meaningful than “the Dow is near an all-time high,” and a bit scarier as well.3. Throughout the trading day, periodic review of three lists called “market statistics” will keep you current on individual issue price movements, active issues, sector developments, and more. How you interpret and use this information will eventually affect your bottom line, weather you are a value stock investor or a small cap day trader. The most-active and most-declined lists describe individual and group activity, identify where some more detailed research might be appropriate, and provide potential additions to your daily stock watch list. The most-active and most-advanced lists will identify the hottest individual issues and sectors, identify areas where news stories may be worth reading, and instantly make you aware of profit taking opportunities.

I know you are tempted to shout “Blasphemy” at the top of your lungs, but the Dow Jones Industrial Average was developed in a pre-Internet world (actually, pre-automobile) where the statistics discussed above were unavailable, only the wealthy cared about the stock market, there were no mutual funds, and frankly Scarlet, 95 percent of the population just didn’t care. Now here’s some blasphemy for you: It is likely that not one person reading this article has an investment portfolio that closely resembles the composition of the Dow Jones Industrial Average. It is just as likely that nearly everyone reading this article will use the Dow to evaluate portfolio performance. I’ve never understood this phenomenon, and I know that change takes time.But really, the Dow (and the other averages) have had their day, and far too much of your nest egg, for you to ignore this reality any longer. Steve

http://www.valuestockbuylistprogram.comSelengut has been in professional portfolio management since 1979. He’s the author of “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy.”Vail, Colorado

Support Local Journalism

Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.

User Legend: iconModerator iconTrusted User