DON'T BET AGAINST THE DOW!
by Nadeem Walayat
themarketoracle.co.uk
December 5, 2007

Investors should realize 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

Stock	Last	Change	Percent	YTD Percent	Year High	All time high	% from All Time High
DJIA	13248	-65	-0.49%	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.

The Market Oracle is a FREE Financial Markets Forecasting & Analysis online publication. We aim to cut through the noise cluttering traditional sources of market analysis and get to the key points of where the markets are at and where they are expected to move to next ! http://www.marketoracle.co.uk

CONTACT INFORMATION
Nadeem Walayat
Market Oracle
Sheffield, U.K.
Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.