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The Dow Jones Industrial Average: Failing the Average Investor
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 DJIA 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
(NYSE) Issue Breadth figures (93% 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 S & P ratings of A or better, and 20% of the
issues ranked below Investment Grade.
Is
the 120-year-old DJIA 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 thirty 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 REITs, Index ETFs, Equity
CEFs, Income CEFs, and even some Preferreds 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 DJIA and other indices) last achieved
All Time High (ATH) levels, monthly Issue Breadth on the NYSE was
positive only in April, followed by a 12 month paper bloodbath extending
through May of 2000. Since then, Breadth has been positive for six
consecutive years. Surprise!
2. Pay close attention to the
number of issues hitting New Fifty-Two Week Highs (52Hs) 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 NYSE Bull Market (not a typo) is clearly
evidenced by six consecutive years (from 04/00) with more issues hitting
new 52Hs than new 52Ls... 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 52Hs and 52Ls 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, REITs, metals,
and energy stocks dominated the hot list while regional banks,
utilities, and other interest rate sensitive issues were no shows (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 52Ls
(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 52H List while preferred shares and Utilities occupy the 52Ls...
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 The 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 DJIA 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% 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 DJIA. 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 Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management
since 1979
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"
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