The Devil In The Details Of The Dow

Tyler Durden's picture

It looks like the Dow Jones Industrial Average will be the first major U.S. equity benchmark to breach new highs, so ConvergEx's Nick Colas breaks down this closely watched measure of domestic stock prices noting that the Dow is a quirky “Index” – price weighted (not market capitalization), compact (30 names) and fundamentally global (lots of brand-name multinationals).  Change just one name in the index, and the outcomes vary considerably.  If Google had been added at the end of last year, we’d be at 14,330 – well over the old high of 14,165.  But if the Dow committee had added Apple instead, the index would have closed at 13,475 yesterday, up less than 3% on the year.  And if Netflix had been the lucky company added for 2013, well…  We’d be saying hello to Dow 15,000, and then some.  As for the “Real” Dow, it remains cheap on forward multiples as long as the Street’s estimates are solid.


ConvergEx's Nick Colas: Mama, Take this Badge off of Me,

“If it bleeds, it leads” is a well-used aphorism in newsrooms around the world.  Actually, if you want to get old-school, it should be “Ledes.”  That quirk of the fourth estate comes from a desire to differentiate “Lead” – the metal used to hold strips of news type on a printing press  - with the “Lead” paragraph of a story.  Either way, the top of an article, the first story on the evening news, the beginning of a radio news program, has to get the attention of the reader-listener-viewer.  That means the sensational and scary have a better chance of getting press than the uplifting and mundane.


There’s one exception to the “Bleeding lede” rule, at least when it comes to financial reporting: the “Record high” close for a closely watched index.  And since there is no better known measure of U.S. stocks than the Dow Jones Industrial Average, the fact that we’re “Knocking on Heaven’s Door” at +14,000 means we should spare a moment and consider what a new record means to capital markets and investors.  A few points to kick things off:


  • The all-time record close for the Dow was 14,164.53 on October 9th, 2007.  Things didn’t go so well after that, of course. The Dow subsequently bottomed at 6,547 exactly 15 months later.
  • The famous Dow 10,000, immortalized on hats that still clutter trading desks around the Street, had its debut on March 29th, 1999.  The last time we were in that neighborhood was June 2010.
  • Going into ancient history – something the Dow, started in 1896 can do better than the much younger S&P 500 – the first time the Dow crossed 100 was January 12, 1906.   It took until November 1972 to hit 1,000 and November 1995 to hit 5,000.
  • We need 111 points, or 0.8%, to hit a new high based on today’s close. The S&P 500’s closing high of 1565.15 is 50 points away, or 3.3%.  The tech bubble of the NASDAQ back in 2000 puts that index at a distant third – the record is +5,000 and yesterday’s close was 3,160.


To understand how this year’s rally has gotten us so close to a record close, it pays to dissect the Dow into its 30 component companies and look at how much each company’s performance has contributed to the gains. We’ve done that in the attached table, and here is a summary of what we found:


  • The ten most heavily weighted names in the index – IBM, CVX, MMM, MCD, CAT, UTX, XOM, TRV, BA and PG – are responsible for 543 points (or 57%) of the total 950 point advance for 2013.  This is large part due to the price-weighted nature of the Dow.  Bigger stock price equals bigger weighting.  Market caps, unlike in the S&P 500 or NASDAQ indices, mean nothing in the Dow.
  • The top contributor is IBM, up 4.8% on the year and adding 70 Dow points.  Yes, that is an underperformance to the Dow’s 7.3% advance in 2013, but because IBM is 11% of the index, it is still the most important plus factor for the Average.
  • Only 3 Dow stock are down on the year: Alcoa (-1.8%), Bank of America (-3.3%) and UnitedHealth (-1.5%).  Their drag on the Dow: a total of 9.4 points.
  • If you are wondering if the Dow is out of runway once it crosses into new high territory, consider the valuations of those Top 10 most heavily weighted names.  We’ve included that data in the accompanying table as well.  Based on analysts’ earnings expectations for 2013, these stocks trade for 13.3x earnings and 12.4x next year’s numbers.  You always have to take these estimates with a large grain of salt, to be sure…  But 12-13x forward numbers is no one’s idea of an “Expensive” market.


Since the Dow Jones Industrials are a pretty rarified club – just 30 household names – there is a cottage industry which operates a lottery about what names might be added to this best-known measure of the U.S. stock market.  It’s not that there is a ton of money benchmarked to the Dow – the S&P 500 and various Russell indices have a strong hold on that business.  But there is an indisputable cache to the Dow, if only due to the 30-name limit.

What if Google or Apple or Netflix had been added at the end of last year?  Household names all, to be sure.  We ran that math for these names and a few others (some rough math included in several attached tables) and here’s what we found:


  • Apple.  The boys and girls from Cupertino have hit a rough patch, with the stock down 17.1% year to date.  Since AAPL has a large stock price – over twice that of IBM – this performance would have hit the Dow quite badly: about 435 points as we figure it.  This would have put the Average at a close of around 13,475 yesterday, rather than the actual 14,054.
  • Google.  I am absolutely not going to order those freaky glasses, but GOOG itself has done well in 2013, up 13.3%.  That’s good for 800 Dow points (big stock price like AAPL, but moving in the right direction) and a new record closing high yesterday of 14,330.
  • Netflix.  The best performing stock in the S&P 500 year to date, and a price that would make it the 2nd most influential stock in the Dow, right behind IBM.  NFLX has been a double year to date, which would have been around 1,200 Dow points.  And a closing high yesterday of 15,275.
  • LinkedIn, Time Warner, and  LNKD in the Dow from January 1 would have put the Dow on track to close around 14,533 yesterday.  TWC hasn’t had as good a year, so the Dow would be just below 14,000.  And CRM – almost no difference to the end of February close.


The point here is that the notion of a “New High” for the Dow is a little arbitrary, by virtue of the price weighting function and stock selection process.  No, I don’t think Apple or Google would make it into the Dow – the price weighting would essential relabel the Average as “Apple/Google and 29 other companies.”  But LinkedIn – and scores of other companies – could have easily lifted the Dow to a new high.  Would the Dow committee every chose such a newbie to include? Hard to tell.

Ultimately, “You dance with who you brung,” and the Dow seems to be our date to the “New High” prom.    That the oldest measure of US stock market performance is the first to accomplish this feat perhaps surprising, to be sure.

But it is still nice to see it in the lead.

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Yen Cross's picture

  Just like the I'shit of yester_year. I crave PRIVACY!

  Long multiple monitor" Trading Platforms".  Long, teaching people how to read a "Generally Accepted Accounting Practices" Guidelines (good fellas) phamphlet!

markmotive's picture

Indexes are not passive investments...

Yen Cross's picture

  Did I say anything about passive investment? TIP's

clara-to-market's picture

The Dow is going to 39,000.

Mark my words.

My mother told me.

That old lady is never wrong.

CPL's picture

Indeed, there is still some residual value in the pension system that hasn't been dealt with.

rotagen's picture

The devil is not in the details of the dow, it is in the details of the Federal Reserve.

HulkHogan's picture

Selling my silver to buy JPM first thing Monday morning.

SqueekyFromm's picture

Oh well, here's another Irish Poem:


Toney Dow

There once was an Index named "Dow."

Which kept going up, God knows how.

Til an H-F-T flash,

Sent it down in a crash,

And the head of the FED had a cow.


Squeeky Fromm, Girl Reporter

CPL's picture

Roses are red,

Violets are blue.

The Feds got nuttin',

Wit quote stuffing.

falak pema's picture

there was once a cow named How

which kept on munching on thistle,

when people asked her why she did it

old How just whistled, mooed and shuffled

Like if she had on blue suede shoes.

Up came a stallion named Dow 

He neighed at old How real bad

Saying : you are so dead beat nobody would milk your teat.

And he was proven right.

'Cos next morning it was Dow who was taken to abattoir.

His proud attributes neatly cut off; tragedy as he gave head.

Moral of story : don't neigh when you can whistle

Eat thistle and never pretend your meat is harder than female teat.

Its gets you fast into deep shit.

Maybe the Dow will now just keep up with the Joneses

And not run with the hares; on a tear going nowhere. 


SKY85hawk's picture

I was told that the Dow-30 i a volume weighted index.

Please explain how price weighting causes the difference between DJI=14,054.49 and Total Closing prices=1,830.28

That's a multiple of 7.6788



NoDebt's picture

Volume has nothing to do with it.  Add up all the 30 companies stock prices and multiply by a "number" (currently it's the one you just calculated) and you get the DJIA price.  The only reason there is a fudge-factor number is to account for things like stock splits, moving companies in and out of the Dow and such without the Dow number suddenly changing by big clumps and bunches the next morning. 

That's also why it's so easy to calculate each stock's impact on the Dow- just take the change in that company's stock price and multiply by "the number".

It's also why "the Pros" don't follow the Dow.  A $4 increase in a $10 stock (40% increase) counts exactly the same number of Dow points as a $4 increase in a $200 stock (2% increase).

Is the fudge-factor number "manipulated"?  No idea.  But it's a number, isn't it?  That makes it subject to manipulation, I guess.


Palladin's picture

You noticed something very important in the Dow that the author of the article ignored, as does  every blowhorn in the MSM. What he left out is the Divisor. Here's how it works.

The Dow, while quoted as an "average" but mathematically it really isn’t.

An Average is @sum divided by @count. And all of the items that are summed up must be of the same type. Inches of rain, times at bat, number of hits, runs scored, etc.

The notion that you can take the price of a stock, which is a variable, and can be any number greater than zero, and compare the price of one stock to another, then add all of the prices of the 30 variables up to come up with some sort of an average is mathematical nonsense.

It’s as if someone wanted up come up with a “Sports Average”, by taking the scores of one team in each of their respective leagues. One football team, one baseball team, one soccer team, one tennis team, one hockey team, one bowling team and so on until you get the number of points scored by 30 different Sports Teams on any one given day. Then total up all of the points and divide by the 30 teams and you then come up with a “Sports Average”. Any 10 year old kid can tell you that you can’t compare the number of points scored by a baseball team and a football team. Two different games, two different methods of scoring, nothing similar except it is a sports game, and they use a ball in both of the games.

Even more bizarre, the prices are treated as equivalent. The price of Chevron, has no relationship to the price of IBM. Both are in vastly different businesses, both have different total sales, head count, etc. They have virtually nothing in common, yet Wall Street has convinced everybody that somehow the price of Chevron and the price of IBM represent exactly the same thing from a mathematical standpoint. And Wall Street has also convinced everybody that the Dow is a good measure of what the "Market" is doing on any given day.

The Dow is in Wall Street terms, a “price weighted average”. Outside of Wall Street there is no such thing. As stated earlier, An Average is @sum divided by @count. Being a “price weighted average” means that a stock with a price of $50.00 will move the Dow twice as many points as a stock with a price of $25.00. It’s like saying rainfall on Tuesday counts twice as much as rainfall on Saturday. For example, if Alcoa (AA) is trading at 8.44 and if it went to zero the Dow would drop only 64.82 points. However, if IBM trading at $202.91 went to zero, the the Dow would drop over 1,550 points. So you can see that changes in the higher priced stocks change the Dow much more than the lower priced ones.

You might think the Dow Jones Industrial “average” is calculated by adding up all the prices of all the stocks in the Dow and then divide by 30. Well you would be wrong. It might have been true at some point in time, but that is not the case today. In fact, if you add up all of the prices of all of the 30 stocks in the Dow, as of 3/1/13, it equals 1,834.71. Then divide by 30 you come up with an average of 61.16, yet it is reported as being 14,089.73. You might ask yourself what accounts for this difference?

Over the years stocks have been added and deleted from the Dow and to compensate for these changes a divisor was created. This mystical divisor was created so that whenever any stocks were added or deleted from the Dow, the “average” would remain unchanged on the day the stocks were added or deleted (?). This makes little sense, since any changes in the stocks from that day forward will change the Dow.

Currently the divisor is 0.130216081 so if you divide the total of all the prices of all of the stocks in the Dow, 1,834.71 by the divisor, you will get the closing price of 14,089.73 as of 3/1/13. Technically it is a divisor, but in fact, it really acts as a multiplier.  From a mathematical standpoint, since the divisor is applied equally to all of the prices it could be any number and the percentage move would be identical. For example, if the Dow moved 2% one day and you were calculating the average the correct mathematical way, it would be 1,834.71 divided by 30 = 61.16 and a 2% increase would amount to an increase of 1.22 points in the average. However calculating the index using the current method would be 1,834.71 divided by 0.130216081 = 14,009.41. and a 2% increase would be an increase of 281.79 points.

Now what do you think the Financial Main Stream Media would like to report, an increase in the Dow of 1.22 points or an increase of the Dow of 281.79 points.  Both are the same percentage increase, yet the larger one carries much more physiological value than the smaller one.

So the Dow Divisor could be any number. It could be the official number of 0.130216081, or any other number greater than zero. Even though the Dow Divisor distorts the reported average by a factor of 230 it could be argued that from a mathematical standpoint it is a valid and accurate representation of  the average of the prices of the 30 stocks in the Dow. But there still that lingering question of the mathematical validity of using the prices of the individual stocks to make up the average in the first place. If you are interested in a complete discussion of how the divisor is calculated, follow this link:

If you want a quick way to figure how each Dow stock will affect the overall average, just multiply the stock price change by 7.5.

For example, if CAT closes at 84.25 + 5.56 then the Dow point change would be 5.56 x 7.5 = 41.7 Dow points.

If you want to be super accurate, you can use the official divisor of 0.130216081. Using the example above the calculation would be 5.56 / 0.130216081 = 42.69 Dow points.


SKY85hawk's picture


This makes a lot more sense than the volume weighted idea, esp. since I have no sources.

I've fussed about the CPI calculation, also.   Colin Lokey

Colin, you're perpetuating the gummint's numeric falsehood GDP component change.  Anyone that remembers high school algebra KNOWS you can’t add individual percentages and get a valid %-change. 

One must add up the multiple components for Last-month and This-month and then calculate %-change on the Total. 

Do you have the underlying numbers that the gummint used? 

The real GDP change might be very interesting!


CPL's picture

You can smell the printers warming up as we type.

Bansters-in-my- feces's picture

Have you ever heard a car horn beep?

PAWNMAN's picture

More evidence, if you need any, of a totally rigged market.

max2205's picture

Lnkd is crap. Why would you bring up this manipulated pos

Yen Cross's picture

 Partake Vikings/  Enjoy the night!/  Sunday will be upon you!  #2 is on the bid!        usd/cyn (fix) Tokyo session. has been nasty for 3 months. Look at the DXY/CNY correlation(EXPORTERS) Look at the lagging ( Baltic DRY)

  Now I know why(i got) ) fucked sideways on the Yen trade today! What a joke!

buzzsaw99's picture

But 12-13x forward numbers is no one’s idea of an “Expensive” market...


What tripe! As if P/E is the only measure of how expensive a stock is. CAT has $40B in debt and revenue growth is negative. IBM has $32B in debt, negative revenue growth and a book value that is abysmal. Shall I go on?

Yen Cross's picture

 Buzz you are the man.  I'll leave it at that. The baltic dry ticked up\ above 'sea level'. The forward numbers are closer to 18-20 when you factor in energy and labor. I'll discuss labor later this year.

dragoneyes74's picture

Oh the Dow, the zombie that wouldn't die.  I did go short at the open, rode the washout, and was smart enough in a stupid trade to put my stop at breakeven, which got steamrolled like five minutes later.  I can't physically force myself to go long on a swing trade in equities at this level, but I'm considering scalping long side day trades on dips like everyone else until it finally falls apart.  

I'm more worried about silver.  It popped nice after the stop-run new lows, but it should have had another leg up when the US opened and all it did was slide sideways.  Not letting it turn red on me.  

Crash Overide's picture

I just heard they found horse & donkey meat tainting the DOW...

Is that the general sediment of the players left, ride it out until it crashes? Any predictions on how much longer?

PS: I am comfortable with silver in the long run. I mean why not.

onthesquare's picture

The virtual world.  It is upon us.  Everything we think, do and speak is virtual.  You do not exist.  Water running under ground.  That said

Keep on Trucken!

dunce's picture

The old saw, figures don't lie, but liars can figure. After exposures like this you might think they would stop lying, but there is always a market for a lie. The truth is your hedge.

Peter Pan's picture

The DOW is like a football team. New players are added all the time and old and dead ones removed to give the impression that all is well.

Compare gold and silver to just about any of the stocks over the last 80 years and you will get a shock.

Uber Vandal's picture

The only original player is GE, however, most of the other 11 of 12 original component stocks exist as part of other companies except for one.

Some former DJIA components included high fliers such as AIG, GM, Sears, Kodak, Woolworth, Bethlehem Steel, Citigroup, and its componet makeup has been changed 48 times in its 116 year history, or once every 2.42 years.


Lord Of Finance's picture

Exactly. The history of the DOW is much like the history of bailouts for banks. The savings and loan crisis is the prime example of new printed money big contracts replacing the old. All is well for the banksters, but for the rest of us, everything just gets more expensive. But of course the inflation that it created was not felt until nearly a decade later. But thanks to the speculative tech bubble and boom, the inflation of the mid late 90's was mitigated by the job growth. The crazy inflation of the mid to late 70's was the result of massive welfare spending along with bank bailouts of the mid to late 60's. That spending spree dwarfed the S&L bailouts so inflation was more severe and there was no real growth to offset the skyrocketing inflation. High unemployment + high inflation= misery. 


  Of course this latest spending spree dwarfs not only those prior mentioned spending sprees, but it dwarfs all the funny money creation in the history of bailouts. Of course we will continue to have increasing unemployment which will make the 70's inflation look like the good 'ole days.


   Ladies and gents. All this new money creation by the treasury and being dumped out of Bens chopper will not really start affecting/infecting this economy until 2016-2020. By then, the moral hazard and lecherous behavior of the fed will be a distant memory to the sheep. Whomever claims the white house from 2016-2020 will get the blame. I don't believe that it will occur under Obama. I hope it does because he is a dick, and it will mean the reset comes sooner. The sooner the better.

newengland's picture

Retail volume down. Institutional buying down. Only Fed up money buys. 

O'bomba and his puppeteers game on...and drone on.

No sane person buys what they are sellng, but their miserable wage slave public relations whores slam the internet boards like ZH to scream at anyone who dissents.

prains's picture

DONKEYS HO! mush you mutherfukers

Jack Sheet's picture

And incredibly, there are still people who believe that "Dow Theory" can predict market trends.

Getting Old Sucks's picture

Problem with the DOW is that most people don't know how it's measured.  They see the DOW gain or lose and think it's the whole market.  A one dollar change in any of the 30 stock's price generates about an eight dollar change in the index.  Subsequently, it can snowball thoughout the market if a few of those 30 companies get into trouble.  People who might not even own a share of the 30 see the DOW fall and think the whole market is tanking and start selling everything.  Of course the elite will swoop in and buy all the solid companies that rode down with the sell off. 

If one could buy individual stocks with their 401k instead of buying into a fund, it would be fairer for the little guy. 

vft2212's picture

But where is the Dow Jones Service Average with old GM, Aig Fnm C Bac and all removed this century. ( relax fellow assholes we're talking THIS century )

DowTheorist's picture

This is why technical readings derived exclusively from the Dow Industrials are unreliable. Thus, the Dow Theory requires that the Transports confirm any movement.

Dow Theorist Schannep goes beyond the Transports and included the S&P (which makes sense since it is a cap weighted index). This is why the improved Schannep's version outperforms the Dow Theory:


EclecticParrot's picture

A bit off topic, but Direxion just announced a bevy of forward and (more importantly) reverse splits on their leveraged ETFs, effective April 1.  Daytraders with per-share brokers will be especially happy to see pesky little devils like TZA available for what should be the 40-50 range after a 1:4 (or perhaps 25-30 if they keep ramping the Russell skyward).  Now, our daily losses can finally exceed our commission costs ! :)

Could this provide further evidence of a top (splitting long funds, reverse splitting short funds)?  I suspect, at least short term, the answer is 'no', but at least it'll be nice to, when the time finally comes, be able to 3X short the Russell for less than 20 bucks for a 20k's worth round trip.

moneybots's picture

What the DOW should do is like what the government dows with inflation indexing.  When beef goes up faster, they say averyone switched to chicken so tehre isn't much meat price inflation.

What they should do for the DOW index is put parbolicly rsing stocks in when the market is rising and switch the index to defensive companies like toilet paper manufacturers when the market is falling, so that they can make things appear better than they really are.

rosiescenario's picture

Major problem will all indexes...Dow, S&P 500, etc. is their survivorship bias....dead soldiers leave the field and are replaced by new ones.....