The Dow Jones Industrials - Is It Still a Blue Chip Average?
By Steve Selengut,
Professional Investment Portfolio Manager
BA Business, Gettysburg College; MBA Professional Management,
Johns Island, SC, U.S.A.
sanserve at aol com
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
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
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 an 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"
Published - March 2011