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Warning - Don't Bet Against the Dow Jones Stock Market Index's Growth Spiral

Stock-Markets / Market Manipulation Dec 05, 2007 - 01:33 AM GMT

By: Nadeem_Walayat

Stock-Markets Best Financial Markets Analysis ArticleInvestors should realise one important factor about the Dow 30 stock market index and other similar general multi-sector indices that are made up of a limited number of stocks. The Indices are designed to exhibit the long-term inflationary growth spirals. In that in the long-run the indices will always move to a new high!


How Can This Be ?

1. Relegation of Poor Performing Stocks and Incorporation of Strong Growth Stocks

The Dow and other similar indices dump poor performing stocks and incorporate strong performing growing bull market stocks. Therefore the indices in the long-run represent a limited number of the strongest stocks of an economy. If the indices were fixed to never change in their component stocks other than for companies going bust or being taken over then the Dow Jones would probably be trading down at 5,300, rather than 13,000. So BEAR that in mind if you decide to bet against the Dow30, Dax30 or CAC 40, and even the FTSE100.

The last change to the Dow 30 saw Eastman Kodak (EK), and International Paper (IP). both of which are off more than 50% from their all time highs and were replaced with bull market stocks.

2. The Dow's Performance Does Not Reflect the Performance of the Underlying Stocks

The Dow Jones 30 Index is up 6.3% for the year, and down 7% from its recent all time high. Whereas an analysis of the performance of the component stocks reveals the following:

  • That only 3 Dow stocks are nearer their all time highs than the Dow.
  • That 20 Dow Stocks are trading more than 20% below their all time highs, and 3 stocks are more than 50% below their all time highs.
  • That the average Dow 30 stock is trading 28.8% below its all time high. Which suggests a more realistic price for the Dow is 10,000 rather than the current 13,250.

Table of ALL Dow 30 Stocks

Name Last Change Percent YTD Percent Year High All time high % from All Time High
DJIA
13248
0.00%
6.30%
14198
14198
-7%
ALCOA INC
35.25
-0.24
-0.68%
17.66%
48.77
48.77
-28%
AMER INTL GROUP INC
55.65
-1.25
-2.25%
-22.34%
72.97
72.97
-24%
AMER EXPRESS INC
57.11
-1.49
-2.61%
-5.87%
65.89
65.89
-13%
BOEING CO
89.99
-1.8
-1.96%
1.29%
107.83
107.83
-17%
CITIGROUP INC
32.55
-0.51
-1.57%
-41.56%
57
57
-43%
CATERPILLAR INC
72.01
-0.005
-0.01%
17.41%
87
87
-17%
DU PONT E I DE NEM
46.5
-0.36
-0.77%
-4.54%
53.9
85
-45%
WALT DISNEY-DISNEY C
32.75
-0.29
-0.89%
4.44%
36.79
44
-26%
GEN ELECTRIC CO
36.25
-0.68
-1.88%
-25.80%
42.15
61
-41%
GEN MOTORS
27.68
-0.93
-3.36%
-9.90%
43.2
94
-71%
HOME DEPOT INC
28.79
0.3
1.04%
-28.31%
42.01
70
-59%
HONEYWELL INTL INC
56.64
-0.42
-0.74%
25.20%
62.29
68
-17%
HEWLETT PACKARD CO
50.71
-0.42
-0.83%
23.11%
62.29
69
-27%
INTL BUSINESS MACH
106.63
0.8
0.75%
9.76%
121.46
138
-23%
INTEL CP
26.31
0.06
0.23%
29.93%
27.54
76
-65%
JOHNSON AND JOHNS DC
67.94
0.23
0.34%
2.91%
68.75
70
-3%
JP MORGAN CHASE CO
44.15
-1.06
-2.40%
-8.59%
53.25
65
-32%
COCA COLA CO THE
62.75
0.55
0.88%
30.05%
63.45
88
-29%
MCDONALDS CP
60.03
0.2
0.33%
35.42%
60.47
60.47
-1%
3M COMPANY
82.09
-0.12
-0.15%
5.34%
97
97
-15%
ALTRIA GROUP INC
77.41
-0.16
-0.21%
-9.80%
90.5
90.5
-14%
MERCK CO INC
58.39
-0.38
-0.65%
33.92%
60.49
90
-35%
MICROSOFT CP
32.77
-0.15
-0.46%
9.75%
37.5
60
-45%
PFIZER INC
23.47
-0.08
-0.34%
-9.38%
27.86
50
-53%
PROCTER GAMBLE CO
73.29
-0.23
-0.31%
14.03%
74.6
74.6
-2%
AT& T INC.
37.86
-0.42
-1.11%
5.90%
42.97
60
-37%
UNITED TECH
74.75
-0.18
-0.24%
19.56%
82.5
82.5
-9%
VERIZON COMMUN
43.8
0.71
1.62%
17.60%
46.24
68
-36%
WAL MART STORES
48.19
0.32
0.66%
4.35%
51.44
70
-31%
EXXON MOBIL CP
88.12
-0.73
-0.83%
14.99%
95.27
95.27
-8%

 

3. The Dow Jones 30 Index Is Manipulated by Significant Market Players Such as the Fed and Large investment banks

We have all heard of the Plunge Protection team ( President's Working Group on Financial Markets), which were formed following the 1987 crash to step in at significant market sell offs to support the market,. specifically the Dow Jones index by primarily buying the futures contracts which through index arbitrage helps lift the components.

Large Investment banks aware of the timing of such open market transactions also jump in to enjoy the ride and therefore also contribute to the manipulation of the Dow Jones Index with an upward bias.

Conclusion
The Dow Jones Index does not accurately reflect the actual performance of its component stocks and is designed with a positive long-term bias as well as being subjected to manipulation by major market players such as the US Central bank.

Eventhough bear markets do occur from time to time, betting against the Dow Jones in the long-run is a losing proposition.

By Nadeem Walayat
Copyright (c) 2005-07
Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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