Don't Bet Against the Dow!
Thu, Dec 6 2007, 09:10 GMT
by Nadeem Walayat
Investorsshould realise one important factor about the Dow 30 stock market indexand other similar general multi-sector indices that are made up of alimited number of stocks. The Indices are designed to exhibit thelong-term inflationary growth spirals. In that in the long-run theindices will always move to a new high!
How Can This Be ?
1. Relegation of Poor Performing Stocks and Incorporation of Strong Growth Stocks
The Dow and other similar indices dump poor performing stocks andincorporate strong performing growing bull market stocks. Therefore theindices in the long-run represent a limited number of the strongeststocks of an economy. If the indices were fixed to never change intheir component stocks other than for companies going bust or beingtaken over then the Dow Jones would probably be trading down at 5,300,rather than 13,000. So BEAR that in mind if you decide to bet againstthe Dow30, Dax30 or CAC 40, and even the FTSE100.
The last change to the Dow 30 saw Eastman Kodak (EK), andInternational Paper (IP). both of which are off more than 50% fromtheir all time highs and were replaced with bull market stocks.
2. The Dow's Performance Does Not Reflect the Performance of the Underlying Stocks
The Dow Jones 30 Index is up 6.3% for the year, and down 7% fromits recent all time high. Whereas an analysis of the performance of thecomponent stocks reveals the following:
- * That only 3 Dow stocks are nearer their all time highs than the Dow.
- * That 20 Dow Stocks are trading more than 20% below their alltime highs, and 3 stocks are more than 50% below their all time highs.
- * That the average Dow 30 stock is trading 28.8% below its alltime high. Which suggests a more realistic price for the Dow is 10,000rather than the current 13,250.
| Stock | Last | Change | Percent | YTD Percent | Year High | All time high | % from All Time High |
| DJIA | 13248 | -65 | -0.49% | 6.30% | 14198 | 14198 | -7% |
| ALCOA INC | 35.25 | -0.24 | -0.68% | 17.66% | 48.77 | 48.77 | -28% |
| AMER INTL GROUP INC | 55.65 | -1.25 | -2.25% | -22.34% | 72.97 | 72.97 | -24% |
| AMER EXPRESS INC | 57.11 | -1.49 | -2.61% | -5.87% | 65.89 | 65.89 | -13% |
| BOEING CO | 89.99 | -1.8 | -1.96% | 1.29% | 107.83 | 107.83 | -17% |
| CITIGROUP INC | 32.55 | -0.51 | -1.57% | -41.56% | 57 | 57 | -43% |
| CATERPILLAR INC | 72.01 | -0.005 | -0.01% | 17.41% | 87 | 87 | -17% |
| DU PONT E I DE NEM | 46.5 | -0.36 | -0.77% | -4.54% | 53.9 | 85 | -45% |
| WALT DISNEY-DISNEY C | 32.75 | -0.29 | -0.89% | 4.44% | 36.79 | 44 | -26% |
| GEN ELECTRIC CO | 36.25 | -0.68 | -1.88% | -25.80% | 42.15 | 61 | -41% |
| GEN MOTORS | 27.68 | -0.93 | -3.36% | -9.90% | 43.2 | 94 | -71% |
| HOME DEPOT INC | 28.79 | 0.3 | 1.04% | -28.31% | 42.01 | 70 | -59% |
| HONEYWELL INTL INC | 56.64 | -0.42 | -0.74% | 25.20% | 62.29 | 68 | -17% |
| HEWLETT PACKARD CO | 50.71 | -0.42 | -0.83% | 23.11% | 62.29 | 69 | -27% |
| INTL BUSINESS MACH | 106.63 | 0.8 | 0.75% | 9.76% | 121.46 | 138 | -23% |
| INTEL CP | 26.31 | 0.06 | 0.23% | 29.93% | 27.54 | 76 | -65% |
| JOHNSON AND JOHNS DC | 67.94 | 0.23 | 0.34% | 2.91% | 68.75 | 70 | -3% |
| JP MORGAN CHASE CO | 44.15 | -1.06 | -2.40% | -8.59% | 53.25 | 65 | -32% |
| COCA COLA CO THE | 62.75 | 0.55 | 0.88% | 30.05% | 63.45 | 88 | -29% |
| MCDONALDS CP | 60.03 | 0.2 | 0.33% | 35.42% | 60.47 | 60.47 | -1% |
| 3M COMPANY | 82.09 | -0.12 | -0.15% | 5.34% | 97 | 97 | -15% |
| ALTRIA GROUP INC | 77.41 | -0.16 | -0.21% | -9.80% | 90.5 | 90.5 | -14% |
| MERCK CO INC | 58.39 | -0.38 | -0.65% | 33.92% | 60.49 | 90 | -35% |
| MICROSOFT CP | 32.77 | -0.15 | -0.46% | 9.75% | 37.5 | 60 | -45% |
| PFIZER INC | 23.47 | -0.08 | -0.34% | -9.38% | 27.86 | 50 | -53% |
| PROCTER GAMBLE CO | 73.29 | -0.23 | -0.31% | 14.03% | 74.6 | 74.6 | -2% |
| AT& T INC. | 37.86 | -0.42 | -1.11% | 5.90% | 42.97 | 60 | -37% |
| UNITED TECH | 74.75 | -0.18 | -0.24% | 19.56% | 82.5 | 82.5 | -9% |
| VERIZON COMMUN | 43.8 | 0.71 | 1.62% | 17.60% | 46.24 | 68 | -36% |
| WAL MART STORES | 48.19 | 0.32 | 0.66% | 4.35% | 51.44 | 70 | -31% |
| EXXON MOBIL CP | 88.12 | -0.73 | -0.83% | 14.99% | 95.27 | 95.27 | -8% |
3. The Dow Jones 30 Index Is Manipulated by Significant Market Players Such as the Fed and Large investment banks
We have all heard of the Plunge Protection team ( President'sWorking Group on Financial Markets), which were formed following the1987 crash to step in at significant market sell offs to support themarket,. specifically the Dow Jones index by primarily buying thefutures contracts which through index arbitrage helps lift thecomponents.
Large Investment banks aware of the timing of such open markettransactions also jump in to enjoy the ride and therefore alsocontribute to the manipulation of the Dow Jones Index with an upwardbias.
Conclusion
The Dow Jones Index does not accurately reflect the actualperformance of its component stocks and is designed with a positivelong-term bias as well as being subjected to manipulation by majormarket players such as the US Central bank.
Eventhough bear markets do occur from time to time, betting against the Dow Jones in the long-run is a losing proposition.
