Wednesday Futures Thoughts – Dissecting The Dow
The DJIA is the most widely followed stock index on earth. Its ebb and flow is scrutinized by day traders, economists, and the investing public at large for clues on the future direction of the American economy. Active traders of the DJIA monitor every tick in the tradable instruments that mirror the index, be they the Futures, E-mini futures, or the DIA ETFs. Many traders like to focus on price alone, holding to the theory that all market information is already inherent in price. This theory is accurate in regards to the past, all PAST market data is reflected in the price.
Price is like an X-ray, showing the inside of the movement but not the cause of the movement. I use price as a basis of my trading decisions, but also like to dig deeper into the factors underlying price in my market analysis to gain a more complete understanding of market dynamics than is available by price alone. This article will begin to dissect the Dow to get you started toward a better understanding of Dow E-mini YM price movements.
The Dow Jones Industrial Average was first created in 1896 by Charles Dow in his “Customer’s Afternoon Letter”. It consisted of 12 stocks that he believed best represented the American industrial economy. When it was first published the Dow was at 40.94 and hit an all time low of 28.48 during that same year. The greatest percentage moves of all time in the Dow occurred during its infancy.
Today, the Dow consists of 30 stocks which are price weighted, rather than market capitalization weighted as most other indexes. This is important to understand, as weightings are affected by price changes only and not by number of shares outstanding.  Believe it or not, the actual components are chosen by the editors of the Wall Street Journal. However, composition changes are rare to insure continuity. The number is calculated by adding up the price of all the components then dividing by a divisor. The current divisor is 0.122834016.Â
Here are the 30 components in weighted order from heaviest to lightest:
As you can see, the Dow represents a very broad segment of the American economy. I normally only concentrate on the 10 heaviest weighted components, IBM through Coca Cola when trading. I have these 10 stocks on my screen at all times during the trading day, watching for unusual activity that may throw or support the index.
Recently, the DJIA has been in the midst of a several day sell off with yesterday witnessing a bounce. However, price is still below the 50 and 200-day Simple Moving Averages. I believe the bias is down in the Dow presently. However, be careful of sharp, severe temporary up moves that are so common in the start of bear markets.
Good Luck!
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.