lystn

Hey everyone, it's Kirk here again and welcome back to the daily call. Today, we are going to be looking at the Dow Jones Industrial Average, commonly referred to as the Dow and trying to answer the question, “Is this a broken index or still something worth following?” I think the first thing obviously is just understanding what is the Dow. If you're never heard of the Dow… I'm sure if you've traded for a while or if you've been in the markets, you've undoubtedly heard of the Dow Jones or somebody call it the Dow or people even just refer it honestly as the market, even though it's not the only measure of the market. But the Dow Jones is basically a price weighted average of the top or the biggest 30 largest American publicly traded company. It's usually done by market cap or by size, not necessarily by stock price. But what we mean by price weighted is that it also means that the higher priced stocks sometimes have more influence on the index performance versus lower priced stocks. There's oftentimes where these companies will come into and out of the index, so it's not like it's updated every single day. If Apple becomes now the largest, then it goes in and then the next day, Apple becomes not the largest, it goes out. It's usually some of the bigger companies that consistently stay at the larger market caps that stay in. And then basically, what we do is we follow these largest 30… They call it the industrial companies because it was originally created I think in 1896 and so, that was more of an industrial time. But now, there's a lot of technology companies in there, but still a lot of retail and export, energy companies, etcetera, places like some of the components are things like Apple, Caterpillar, Coca-Cola, Axon, Goldman Sachs, Home Depot, IBM, Intel, etcetera. One of the components I think that's actually interesting at least at this time right now is GE which is General Electric which I think is still one of the only original 12 components in the Dow. I think there was only 12 originally and GE was one of their original ones in 1896. Although it’s still in the index as of right now, I don’t know if GE will actually stay in the Dow index because its stock price is just basically cratering right now and so, therefore, it’s losing a ton of market value and may be surpassed by something else. It’ll be interesting actually in the next couple of months to see how that ends up working out. But like I said, there’s components that frequently come in and out. Apple, Goldman Sachs, Nike and I think Visa all were added in the past three years. Some of those newer companies, some of these technology companies are starting to come up, start to get added to the index and it starts to reweight everything going forward. I think some of the major benefits to looking at the Dow and tracking the Dow… We do and you can trade the Dow with options using the ticker symbol DIA. But one of the big benefits is just knowing as a whole group where these 30 largest companies are going. Obviously, they’ve become a bell weather for the market, for the economy here in the US. If you have a good idea of where these 30 companies are going and you can track their prices on average, then it’s a good idea, a good indicator of where the market is and how healthy the economy is. Like I said earlier, when I just listed the names of some of the companies in the Dow, you can see it is a wide variety of different indexes and sectors, so it’s not totally focused on tech like maybe NASDAQ is, but it is a wide variety. The biggest downside I think to the Dow obviously is that it’s only 30 stocks, so it’s not really a huge basket of securities and in most cases, there’s a couple of thousand different stocks or ETFs that you can trade that might give a better representation of things. Obviously, the SaP 500 is considered the market portfolio. The efficient portfolio frontier is where that’s at. I think that’s maybe a better representation of the overall market and a better target to shoot for, for beating risk-adjusted returns. But at the same time, the Dow is not by any stretch, something that we don’t look at. It’s not something that we’re going to totally ignore. I just think you have to use it in the context of what it is. It’s the largest companies, therefore in some cases, maybe the smallest moving companies, but the most stable companies as well. Hopefully this helps out. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!