Stock marketing trading: Dow hits record high – where now?
The Dow Jones hit a record high on Tuesday as the share index returned to levels not seen since before the financial crisis.
It peaked at 14,226, beating the previous intra-day trading high of 14,198, set in October 2007.
The Dow Jones has more than doubled in value since it plummeted to less than 6,550 points in the depth of the crisis in March 2009.
But who really cares when the index is so arbitrary?
Adam Nash points out a in blog post:
“Just thirty stocks, hand picked by committee by Dow Jones, with no rigorous requirements. Worse, it’s a ‘price-weighted’ index, which is mathematically nonsensical. When calculating the Dow Jones Industrial Average, they take the actual stock prices of each stock, add them together, and divide them by a Dow Divisor. They don’t take into account how many shares outstanding; they don’t assess the market capitalization of each company. When a stock splits, they actually change the divisor for the whole index. It’s completely unclear what this index is designed to measure, other than financial illiteracy.
“In fact, there is only one justification for the Dow Jones Industrial Average being calculated this way. Dow Jones explains it in this post on why Apple & Google are not included in the index. To save you some time, I’ll summarize: they have always done it this way, and if they change it, then they won’t be able to compare today’s nonsensical index to the nonsensical index from the last 100+ years.”
IW says: “Absolutely! Couldn’t agree more. The S&P500 is a much more “modern” and representative index altogether.”
Crash on the cards?
Despite what Nash says, the Dow does matter and what happens to the index over the coming months could be extremely interesting.
IW says: “It matters, because people in the mass believe that it matters. Once it begins to fall (and it will!) people will get twitchy, and as the fall gathers momentum, they’ll become even twitchier.
“There are a lot of people buying at the moment who will have stop losses just below the lows of 25/26 February. Once that price is broken, the drop will gather momentum & once below 13600, little will prevent it from continuing to drop.”
Could another crash be on the cards? Harry Dent, author of The Great Crash Ahead, believes the Dow will plummet to 3,000 this year.
IW says: “Perhaps not this year, but a drop to 4000 or so is highly likely before 2016 has ended.”
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