In addition to a well thought out investment plan, successful equity investing requires a feel for what is going on in the real world we 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 it 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 (90% of the Dow stocks are traded there) shows how the Dow has not been prescient or historically accurate with regard to broad market movements for the past twelve years. Additionally, this financial icon that investors revere as the ultimate "blue chip" market indicator has lost its luster.
Only 40% of DJIA companies claim an A or better S & P rating, 20% of the issues are ranked below investment grade --- and this after recently (and quietly) dumping AIG, C, GM, and HON. Has the long-in-the-tooth DJIA grown impotent? Hasn't it really become a mini-S & P 500?
Well, it's certainly helpful for peak-to-peak analysis right now, for example, to see if your large cap equity portfolio is as high as it was in October 2007. Otherwise, it's based upon a seriously flawed "buy 'n hold" strategy and universally misused as a market barometer --- 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 funds masquerading as individual securities) that, in the real investment world, have become "the market".
And is there just "a" market, when REITs, Index ETFs, Equity CEFs, Income CEFs, and even some preferred stocks are mixed together in such a way that not one brokerage firm statement is capable of distinguishing income purpose securities from the others?
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 all exchanges are tracked daily, documenting numbers of advancing versus declining issues. Rarely are these numbers reported in the media, especially if they run counter to institutional propaganda.
2. Pay close attention to the number of issues hitting new Fifty-Two Week Highs and Lows each day: for trend corroboration, sector analysis, and to obtain a wealth of important information for daily decision-making and periodic performance understanding. You may even be able to gauge interest rate expectations and predict where (and why) your portfolio market value is heading in one direction or the other.
Take 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.
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, whether you are an Investment Grade Value Stock (google IGVSI) 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.
Can a glimpse of the DJIA ever provide this kind of information? I don't think so.
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 and only the really wealthy cared about the stock market. (By the way these are the folk that provide the jobs --- then and now. We need a government that allows that to happen.)
When the Dow was born, there were no mutual funds, money funds, ETFs, IRAs, 401(k)s, CEFs or Quotrons, even --- and, frankly Scarlet, 95% of the population just didn't care. But here's some more 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 his or her portfolio performance. I've never understood this phenomenon, and I know that change takes time ---but really.
Instead of rejoicing as the DJIA and S & P establish new three year highs, pay attention to some reality based numbers: together they remain about 15% below where they were at their October 2007 highs. Each would have to gain and additional 18% or so to break even with where they were more than three years ago.
The Investment Grade Value Stock Index (more blue chip than the others) is up 11% from its October 2007 level and at a new All Time High --- right now. Wall Street managed portfolios generally do not out-perform the averages. Portfolios that use IGVSI equities in combination with a 30% income security asset allocation have consistently outperformed the market averages --- cycle to cycle.
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"