Gauging the Dow’s Record Highs

The Dow made another record high close yesterday.

Or did it? Remember, the Dow is price weighted, which makes
its price behavior a bit odd — at least when compared to market cap weighted indices  like the S&P
or the Nazz.

Bob Bronson makes the following observation regarding the Dow’s record highs:

"While the DJIA 30 stock index closed on 11/15/06 at 4.5%
above its all time high, only two components made record highs, with four more
less than 3% below their all-time highs. 17 (57%) of the 30 made their all-time
highs more than five years ago, and, on average, they’re 27% (median 30%) below
their individual all-time highs    ."

Here are the details:


Click for larger table display




Tracking the Dow accurately
Robert E. Bronson, III
Bronson Capital Markets Research

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What's been said:

Discussions found on the web:
  1. Rich commented on Nov 18

    One error in the table I noticed: Shares in Walt Disney peaked at $42.22 when adjusted for the split that occurred in 1998. Taking that account, the decline is only 25% from the all-time high, not the 70% shown in the table. Not sure if any other issues aren’t reflecting spit-adjusted prices in the all-time high column.

  2. curmudgeonly troll commented on Nov 18

    A new high means that, on average, each component is above where it happened to be at the previous high, not for all time.

    When the S&P or Dow makes a new high, only a small percentage of stocks is likely to be at or near an all-time high. It’s perfectly possible for the average to be at a new high when no component is at a new high.

    This is a quirk that a (mathematically challenged) skeptic will trot out any time anything makes a new high. Now if you said, only 25% of the stocks are above where they were at the previous high, that would point to an alarming lack of breadth.

  3. Lammert commented on Nov 18

    From the ‘Blog of theeconomicfractalist’

    Veterans Day and 22 November 2006: The Corrected Maximum Growth Saturation Day.

    The Quantum Fractal Hypothesis, Theory, and Laws of Saturation Macroeconomics. Science: ‘ an operating process that looks for patterns and organizes them as theories or laws …..’ The real science of Quantum Fractal Saturation Macroeconomics is defined by composite asset valuation saturation curves. The valuation saturation curves are organized in a precise and elegant mathematical repetitive fractal order intrinsic to and optimally self-assembled by the causal self-balancing oppositional major elements of the nonstochastic macroeconomic universe. This new paradigm view of the macroeconomy may provide monetarists, macroeconomists, and national banking reserve and regulatory agencies a new framework in assessing and controlling macroeconomic dysequilibria incurred by the major money expansion parameters of interest rate policy, lending policy, governmental debt, and perhaps the investment asset area of equity classes. The latter of these elements consumes much, adds little to the real economy, and is ultimately a source of amplified instability and devolution near the end of great credit cycles. Malinvestment in equity paper assets – rather than facilitated investment in savings, innovative or improved domestic products and services, national infrastructure, and domestic factories – ultimately subtracts from the available creative investment money that produces sustaining and linchpin domestic wages. Imprudent policies and practices involving the aforementioned elements leads to overvaluation, overproduction, over supply, over borrowing, and malinvestment. With the rate limiting factors of one: wages of the masses which are both dependent on and supporting of the whole system and two: ongoing accumulating debt load which ultimately limits and contains dynamic and useful consumption, the excesses created by the money expansion elements necessarily causes or leads to a final asymptotic saturation state where money growth is exactly balanced by asset devolution, debt default, and money contraction. After asymptotic saturation,interconnected and progressive asset deflationary collapse rapidly occurs proportional to the accumulative preceding excesses in debt, over supply, and money expansion. It may be that paper equities representing an amplified derivative of companys’ profits, assets, potential earning powers, and debt loads – now considered as an asset class with useful economic purpose – are the most illusive and destructive of all malinvestment areas, unnecessarily amplifying money destruction during the asset deflationary phase. The empirically derived mathematical law for maximal quantum fractal growth is: X/2.5X/2.5X :: 159/398/398. 24 November 2006 is the 398th trading day of the ideal 2.5 X third fractal maximum growth. 24 November 2006 is the final Ideal Maximum Saturation Day for the 14 trilliondollar Composite Wilshire – (secondary to its March 2000 all time high.) Kindly visit: The Economic Fractalist. Lammert…..Addendum and correction: Veteran’s day, while a holiday for this veteran, was not a trading holiday. The 398th day for the Wilshire is 22 November 2006. The 16th day of the concurrent and final 8/20/16 day growth fractals for the ten year note, 30 year bond, and CRB is 22 Novembr 2006. The 58th day of the 29/73/58 day fractal for GM is 22 November 2006. 22 November 2006 is the ideal final saturation day for the Wilshire secondary to its March 2000 alltime high. Lammert.

  4. ECONOMISTA NON GRATA commented on Nov 18

    Is there a rational explanation for this rally…? Please note, I said rational.

  5. Mark commented on Nov 18

    Whatever happened to Professor Irwin Corey? No particular reason for asking.

  6. Byrne Hobart commented on Nov 18

    I’m pretty sure that’s how it always happens: As long as stocks in the index don’t move in lockstep, you shouldn’t necessarily expect most of them to make all-time highs at exactly the same time. In fact, an index could easily reach an all-time high with none of the stocks near their all-time highs (if there had been a few standouts and a lot of laggards, and they all reverted to the mean, for example). That’s what diversification is all about.

  7. whoknew commented on Nov 18

    What about spinoffs (possibley T), acquisitions and dividends? By including these corporate actions would it support the table displayed above?
    What would the table look like the last time the Dow broke a previous high (Nov. ’82)?

  8. Eclectic commented on Nov 18

    The stocks in the DJIA are changed so often, the only valuable information the level can tell us is whether the market is going up or down in segments of time.

    If Dow kept their proprietary index fixed with some of the former loser stocks in it, they’d lose the ability to sell it, because the herd doesn’t like bad news.

    Anybody with any common sense, whether they’re mathematically challenged or not has long ago disregarded the DJIA as having any more merit than I’ve stated above.

  9. Bullion commented on Nov 18

    I have just listen to an audio commentary by Ken Fisher in Market Watch, where he says that the housing slump is already priced in the stock market.
    He also predicts a very good year for stocks in 2007.
    My thought: housing is just 5% of the economy, and in fact even if in November 29 th the GDP for the 3Q of 2006 is revised sharply lower, from lets say 1,6% to 0,8%, this may in fact be good news : it may be interpreted by the market as a prove that a soft landing is under way: corporates continue to show very good earnings even with the housing slump.

    I ‘m beginning to think Ken Fisher may be right!
    Dow 13000 by year end?

  10. amadeus commented on Nov 18

    Whatever happened to Charles Nenner and his very
    bearish outlook on the market from September till
    the end of the year???

  11. angryinch commented on Nov 18

    “The stocks in the DJIA are changed so often.”

    Hardly the case. Since the 2000 top, there have only been three component changes in the past six years: AIG, PFE and VZ replaced T, EK and IP back on April 8, 2004.

    That’s it.

    The price of the Dow, to a large degree, has become a political symbol of the U.S. eCONomy. You could see that very clearly when it bottomed at exactly 10,000.01 in the spring of 2005.

    Even though traders rarely play it or pay attention to it, the Dow is the public face of the U.S. stock market. It’s the one index that is always mentioned by the talking steaks on the evening news. Despite the fact that the SPX is the far more significant index, it rarely gets a mention in the brief market recaps.

    It’s not expected that every component would be making a new high as an index makes a new high. But the Dow has only 30 components. It speaks volumes about the “invisible hand” guiding the Dow price that fully 17 of 30 (57%) of its components remained more than 25% below their all-time highs as the Dow itself made a new all-time high last week.

    It has become increasingly important to consumer sentiment that the Dow stay elevated. And it’s not hard to accomplish.

    Some find it absurd to think that the PTB would surreptitiously support a key index like the Dow simply to keep folks from losing confidence in the economy. But it wouldn’t be the first time.

    Horace Walpole said it best back in 1782, “Stocks are no longer the weather glass of fortune, but a part of the mask employed to disguise the nation’s own face to itself.”

    Nothing new under the sun.

  12. Cherry commented on Nov 18

    Housing is more than 5% of the economy.

  13. Sherman McCoy commented on Nov 18

    I have an idea that I’d like to throw out there regarding the new highs and the Ritholtz Conundrum of “inflation ex-inflation”. I might have a big hole in my thinking, so please point it out, and sorry in advance for what will certainly be a long comment:

    Let’s say that the population of investors knows that there is inflation. How they come to this knowledge is irrelevant, but assume that they are fully CONVINCED that there is plenty of price appreciation on every level (prod/consumer/etc…). And so Econ 101 says that, when they act on this information, they will not buy fixed-income investments such as bonds and mortgages, and will buy inflation-adjusting investments like stocks.

    Now one of the big “checks” on the stock market here would be the FOMC. The FOMC ought to notice the inflation that all sensible investors acknowledge exists, and take action to raise interest rates, making bonds cheaper and diverting some money that would have gone into stocks into bonds.

    But what if the FOMC has- as general principle- decided to abstain from this role? You could say that the “inflation ex-inflation” reports tell the FOMC that there is RELATIVELY LITTLE inflation. And then you actually have two types of inflation you have to consider: (1) the “inflation” that market participants acknowledge is there- the “real inflation”; (2) the “inflation” that goes into government reports and from there into FOMC decisions- Barry’s “inflation ex-inflation”. There is no more “the” (as in single) inflation. There are different inflations for different purposes. And I think this might go a long way towards explaining the current market rally.

    As an additional point in this direction, what the hell happened in 2001? Why did the FOMC go so low and stay there so long? Certainly there were legitimate fears about the “new terrorist world” and all that, but in retrospect don’t most of you acknowledge that it was unnecessary and just juiced the money supply? And then the Fed goes on and does a number of other things to juice the money supply more??! And then M3 disappears cause they’ve juiced the money supply so much that they don’t want anyone to know about it??

    You could look at all of that from 2001 on as a symptom of the Fed decoupling the “data” that it uses to set monetary policy from THE “data” that most of the investment world acknowledges is correct. And it’s just gotten worse and worse.

    So maybe, all in all, this rally is due to the markets reacting in a perfectly rational way to a Fed that, for the last five years, has chosen to act in an increasingly irrational way regarding what the “data” is.

  14. Mike commented on Nov 18

    To Sherman:

    The thing I would counter with is that the currency market doesn’t/should reflect something to the effect you are arguing, that the market concedes higher inflation. Looking at usd vs euro and usd vs yen over the last 5 years doesn’t paint that picture. If you argue for inflation in all major currencies but not a discernable difference between any 2 currencies, then gold should be higher, and on a 2 year horizon it is.

    From my perspective it seems most financial markets are leaning more towards complacency predicated on easy credit than any kind of concession on inflation.

    The current dilemma in my mind is the objective of the fed and government. Hank Paulson commented not to long ago that his hope was the current stock market environment would couterbalance some housing effect. Perhaps he was being hopeful, but perhaps there is a plan. But I would fear a government trying to inflate the money supply to stave off nominal losses in housing. A lack of M3 data doesn’t help the conspiracy theories (cancelling M3 was a terrible PR move on the government’s part. it only makes people wonder).

  15. Sherman McCoy commented on Nov 18

    Thanks, Mike. That’s a good point you make about the currency market.

    About “inflation across all major currencies”: Perhaps what I am suggesting IS across all major currencies, but segmented in a vertical direction. Over the past five years, I think you could say that there’s been strong price appreciation among professional services, commodities, buying a house, etc…, while it has been much less for Wal-Mart-style goods, labor wages, renting a home, etc… And at a very high-level this segmentation does seem to appear on a global scale.

    Also, doesn’t “complacency predicated on easy credit” inherently involve an expectation of future inflation? I don’t think you can expect an extended period of easy credit without (1) also expecting the necessary cleansing clamp-down OR (2) anticipating inflation across-the-board, forcing a clamp-down by forcing an increase from insufficient interest rates.

  16. jason commented on Nov 18

    hewlett packard’s all time high was in 2000 not 2006 like the table says.

  17. Michael C. commented on Nov 19

    >>>Barry has nothing to do except scaring people.
    He is in cash when stocks are up and he is in cash when stocks are down.
    Is he a trader or a talker?<<< Nanci the Troll !!!!

  18. Richard commented on Nov 19

    if you invest in the major index funds like most non-savvy 401k contribution folks do then yes you’ve seen an all time high. if you’ve been consistently contributing for the last 7 years you’re not doing too badly. that’s why you have to be long and not try and time the market if you don’t trade for a living.

  19. Mike commented on Nov 19

    @ Sherman:

    “Also, doesn’t “complacency predicated on easy credit” inherently involve an expectation of future inflation?”

    I absolutely agree that the easy credit needs to be purged from the system and that higher inflation should be accounted for but I don’t think we are seeing it reflected in the markets right now.

    The solution I would like is for the Fed to quit meddling and let the business cycle run it’s course. This limbo we are in where the Fed tries to create a perpetual bull market is not allowing bad business to die and prevents capital and more importantly human resources from being reallocated in the economy. I don’t think we will see new growth and innovation on a meaningful scale unless the cycle runs its course. But a recession could be a very painful thing in this country if all of a sudden the markets decide to tackle the financial dilemmas facing this country.

    All we can do is wait and see.

  20. Posit Comitus commented on Nov 19

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    Lam Liang Corp.
    Stevenson Darren R (President, CEO, Secretary)
    SOLD 30,000,000
    PRICE $50,000.00

    Steve darling! Call me! Love ya!

  21. Bill a.k.a. NO DooDahs commented on Nov 20

    You critique price-weighted versus cap-weighted indices. A question:

    How many stocks make up 50% of the WEIGHT of the Dow? Divide that number by the 30 stocks in the Dow.

    Now how many stocks make up 50% of the WEIGHT of the S&P 500 and divide that number by the 500 stocks.

    Just curious, which one is more prone to movement from just a few stocks, if they’re the right stocks.

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