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All the hype talk about the Dow being close to a new high has been driving me nuts. It always annoys me when people refer to the Dow as "the market". Just yesterday I heard a couple of people on CNBC look at the indices and say that "the market" was up. At the time the S&P 500 and Nasdaq were in the red but the Dow was up by a few points. I guess some people see what they want to see.
As you may have noticed I usually don't mention the Dow. There are a couple of reasons for that:
- The Dow is only 30 stocks. That's a tiny sample to use as a proxy for "the market".
- The index is price-weighted so higher priced stocks more impact on the index than lower priced stocks.
It seems to me (but what do I know?) that you'd want an index, especially one that only contains a handful of stocks, to be either market cap weighted or equal weighted. As the index stood yesterday Boeing Company (BA) had the most weight at 6.11% of the index, yet Boeing is twentieth based on market cap. ExxonMobil (XOM) has a market cap more than 5 times Boeing but its weighting is only 4.39%. General Electric (GE) which is the second largest company in the index and also dwarfs Boeing in market cap only has a 2.39% weighting. (Below is a chart of the components by weight. Click for the full size chart.)
I could go on & on but it's all been written before -- here's a good article about some of the problems with the DJIA as a market indicator.
So back to the current Dow new high mania... Given all the media coverage about the Dow nearing its old high one might be lead to believe that a majority of the Dow components were close to their old highs. As you'll see below that's certainly not the case. Nine of the components are above where they were on January 12, 2000, the day the Dow peaked. Only 12 stocks are better than 10% below their Jan. 12 closing price. 15 (yes, half!) of them are more than 20% below their Jan. 12, 2000 close. The numbers on the chart below don't seem like much to celebrate.
It'd be interesting to see what a market-cap or equal weighted Dow chart would look like. Given the performance of Microsoft (MSFT), Wal-Mart Stores, Inc. (WMT), GE, and Pfizer Inc. (PFE) -- 4 of the 6 largest -- I doubt that chart would be pretty.
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