Thursday, February 5, 2009

The DJIA, DOW 30... or is it the DOW 15? A Skewed Index.

The DJIA is made of 30 companies. It is a price-weighted index. Every $1 each stock moves, the index moves a fixed 7.96 points. This means that companies that have dropped considerably lately, such as C, BAC, GE, GM, account for next to nothing of every day's moves. These companies have share prices well under $10 and should not really be part of the index. Removing them, however, would be catastrophic for these companies and would have too many undesirable consequences for the market.

So the result is a skewed index. Comparing its value 6 or 3 months ago to today's value may be irrelevant, like comparing apples to oranges, or like doing technical analysis o temperature in Celsius versus Farenheit. You have to wonder about concepts like support and resistance for what they were supposed to mean. What was support or resistance 6 months ago, was actually support on a very different underlying.

Also interesting is that an investor who would have purchased the companies as opposed to the index would have faired much worse than this index, given the drop of a considerable number of companies. For example, an investor who had bought the 30 companies at the close of Dec 31 2008, would be down today -13,73%. The DJIA iself was at 8,776.39 at the close of Dec 31 2008, now it is at 7,956.66, a decline of -9.3%. A investor who bought the DIA instead, would be down only -8.9% (from 87.52 to today's 79.69). This difference of 32% in little more than one month!

Here is a longer term comparison: From the close of December 31 2007 to today. The DJIA was then at 13,043.96, or 39% above its current value.The DOW 30 companies are down 40.87% o average, which is much closer to the index drop. So, this skewing of the index appears to be a recent phenomenon, perhaps triggered by the collapse of the financials whch are now nearly worthless in the index.

The top 10 most influential companies of the index were responsible for 80.01% of the index yesterday, February 4, in terms of points. They are:

  • KFT
  • DIS
  • WMT
  • PG
  • MCD
  • VZ
  • KO
  • MMM
  • UTX
  • T
You can see the enitre list here for February 4:

(Please click on image to enlarge)

Note that on pure price basis, GE, AA, BAC, C, GM are the least important of the index today. Here are the stocks ordered by price:

From the above, meet the "DOW 15":

  • IBM
  • XOM
  • CVX
  • JNJ
  • MCD
  • PG
  • MMM
  • UTX
  • WMT
  • KO
  • BA
  • HPQ
  • VZ
  • CAT
  • MRK

On any given day some of these may change, but chances are they will be the most influential on the DJIA.

I have added this as new worksheets on top at You can see what happened Feb 4, and what will happen today, Feb 5, on a 20-minute delay basis.

Stumble Upon Toolbar


Deming said...

Well stated. And a good reason to use the S&P 500 as the market barometer in lieu of the skewed DJI.

Will the DJI survive after a makeover down the road? Or just fade away, a victim of the times and wall street financial greed?

PS. What are you doing up at 4:35 a.m?

Seamus from down under ;)

The Shocked Investor said...

Indeed Seamus this index could very well fade away. it is not what it used to be. My favorite is the IWM and it seems to also act as a lead indicator.

Enjoy the warm weather down under, you deserve it!

Financial TV

Blog Archive

// adding Google analytics