Yesterday Dow Industrial closed above 14,000 the first time in history. Many people, bulls, bears, analysts, CEOs, ordinary workers,…all get excited about this. Many US workers have 401k plan, and I bet some of that is invested stocks (indirectly through Mutual Fund).
But Dow Industrial is NOT a good indicator of the overall stock market. I read it first in Ken Fisher’s latest book “The Only Three questions that count“, this was also confirmed by Mark Faber (CNBC) and trader Mike. Here are the reasons:
1) The 30 stocks of Dow Industrial made up a tiny fraction of overall US stock market. It does contain stocks from different industries, but it’s not as diversified as S&P 500.
2) More importantly, Dow index is weighted by the price of the stock, for instance, IBM is priced at about $115, it will have 3 times weight of GE (which is about $40). This does not make sense because IBM market cap is $170 b vs. GE’s $416 b. But this does explain when Caterpillar (CAT) got hit by the earning miss today, the Dow tumbled mostly because of this (CAT was about $87 as of yesterday).
A more accurate measure of large cap US stocks, is the S&P 500. I think that’s another reason we have ETFs for S&P (SPIDERS), such as XLE, while we don’t have ETFs for Dow.
But Dow obviously is more familar to average people because of its history, and more entertainment value, that’s may be one of the reasons for Murdoch’s recent pursuit?