What You Don’t Understand About the DOW Is Costing You Profits

The most widely recognized stock market measure on earth isn’t dead, just as a market opinion in the sense that the multi-year rally run could have come to an end. Seriously, learning to understand about the DOW will help you become a better trader.

The days of the blue-chip index being the market barometer are long gone.

The DOW is a small slice of the stock spectrum with only 30 stocks and weighted by price, not capitalization.

That calculation makes high dollar DOW stocks much more impactful than those with cheap share price. Ask yourself if it makes sense that 3M is more than three times as important as Microsoft?

It’s that flawed math that ignores the market value to rank companies.

Any given day, a major move in DOW component can have a disproportionate pressure on the index price. Equal percentage moves among two stocks don’t calculate comparably.

The flawed computation combined with a limited scope or swath of securities sharply limits the value of tracking the industrial measure.

When discussing market action, the S&P 500 is the score not to ignore. It’s the broad market indicator that determines success or failure.

Size is important with nearly 20 times the stocks selected in the S&P 500.

More importantly, the bias is to industry giants where capitalization is all that counts.

The ten sectors within the S&P enable a view of slices of the market. The broad market indexes construction better smooths out individual stock or sector performances through diversification.

Mutual funds, 401K and IRA returns are always compared to the S&P. Beat or hit the street, as investment management turns over unless you can outdo the mighty S&P.

“Reminisces of a Stock Operator” by Edwin Lefèvre describes an epic time in the markets at the turn of the last century when the DOW was king.  Many market lessons can be learned from him, while the one for today is that the DOW is dead.