Sunday, July 21, 2013

May 26 (1896) Dow Jones Industrial Average is formed; "The market is not like a balloon plunging hither and thither"

Dow Theory Generates a Buy Signal


On this day in 1896 Charles Dow and Edward Jones first published their index of twelve industrial companies in the Wall Street Journal. Though only one company remains of the orignal twelve (GE), and the index is now thirty, mostly non-industrial companies, the Dow Jones Industrial Average remains the primary proxy of economic performance. The Dow index has grown from a low of 28 in the summer of 1896, to a high of 15,388 on May 21, 2013, an increase of 53,969%

Dow's first index--called the Dow Jones Average and published in 1884--was primarily railroad companies. He theorized that in well-functioning markets, if there's a run up in transportation stocks, there must be a corresponding bull market in industrials.  If the indices did not move together, change is in the air.

This idea became a central component of the Dow Theory, which is still studied and used today.

In his book Scientific Stock Speculation, Mr. Dow offers this advice.

"The best way of reading the market is from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole it represents a series of well considered effort on the part of far-sighted and well-informed men to adjust values to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of the property which they propose to buy, will lead investors and speculators six months hence to take stock at figures ten to twenty points above present prices...

To know values is to comprehend the meaning of movements in the market."

Image from InvestorPlace.

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Flannery O'Connor

You shall know the truth and the truth shall make you odd.