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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: paulmcg0 who wrote (20713)	6/19/1998 10:51:00 AM
From: Robert Graham	Read Replies (1) \| Respond to of 94695

IMO stock indices do not need to be complete in any way to be an important indicator to the market that can even reflect in some accurate fashion the rest of the market. If you have enough people watching it and basing their decisions on it, then the index will reflect a reality of the stock market that is worth noting. In this way it can provide a leadership role to a signficant group of market players. At times they can be considered a more "complete" representation of the market comparable to the role the S&P 500 has in the stock market, where the S&P 500 index is considered a more complete and accurate representation of the market by many for the arguments that you have proposed. Furthermore, we now have program trading and options on indices. The DJIA is part of the S&P 500. The Dow is a good place to help gauge program trading activity on the S&P 500. For instance, when the TICK swings violently over to one side or another, a program trade has been tripped off. Indices can also be used to gauge the activity of a specific type of buyer. The DJIA is very good in this regard for people who are interested in the bluest of the blue chip stocks such as you would see in the flight to quality by investors from other countries. When we saw the DJIA and the bonds diverge from the rest of the market, such as that represented by S&P 500 at one time in the not so distant past, this was the result of such money. Also sector and industry indices are not representative of the market as a whole, but they are very important in helping to determine money flow from rotation and what sectors and industries are strong and weak. So for instance even though the myth of the DJIA representing the market in a quantitative respect is not true, in another very real aspect the DJIA can represent the market and often does. For example, the NASDAQ is a large index representing all the stocks on an entire electronic "exchange". Do you think this is more representative of the market than the DJIA when money has been flowing from NASDAQ stocks to blue chip stocks that are specifically part of the DJIA and S&P 500? In the more recent past, IMO the NASDAQ index has been relegated to a measure of the public speculator's sentiment since it would be primarily the public who would still be chasing the high tech stocks at this point in time. So in this sense, the DJIA has been more representative of the market than the NASDAQ. Strong divergences that has been seen periodically between these two indices has resulted from this movement of money. When this market adjustment bottoms, guess where some of the money from bonds will go? Initially to the "safer" blue chip stocks that can be found in the DJIA and the bell-weathers of the market. Just my opinion. Comments welcome. Bob Graham

To: paulmcg0 who wrote (20713)	6/19/1998 11:28:00 AM
From: Berney	Respond to of 94695

Paul, I always enjoy academic trivia. but ... where one starts is critical. Sure, if one starts in 1928, right before the big one, one is not even until (relying on memory) the mid 1950's. So the numbers get pretty funny. From John Bogle's book (Bogle on Mutual Funds), where he made the case for indexing, he uses 10.3%. But let's make it more relevant to today. At the end of May, the Index had gone up at a 5 year annualized rate of 22%. In my universe of some 7,500 companies, 4,310 had a 5 year performance figure. The average of these companies was 11.8%. In fact, 26% were negative for 5 year performance (ouch). However, if one looks at the 85 companies with a market cap of more than $40B or are on the DJIA, the annualized 5 year return was 30%. Indexing has had an incredible impact. Berney