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The Dow’s New Highs Aren’t All They’re Made Out To Be October 28, 2006

Posted by Unreasonable in Matters Financial.

As usual, John Mauldin makes some very good points in his latest newsletter:

  1. The Dow is only 30 stocks.
  2. 20 of those stocks are below their high price in 2000.
  3. 15 of them are >25% below their high price in 2000.
  4. As Barry Ritholtz has noted, none of them were making new highs as the index was.
  5. The Dow is price weighted, which is pretty useless. High-priced stocks can skew the average, but price is a meaningless measure when a company can split or issue new shares at will.
  6. The new Dow highs are mainly due to 4 expensive stocks that are doing well.
  7. The S&P 500 is market cap weighted. That means larger companies affect the in the average more than smaller ones. The S&P 500 is not making new highs.
  8. The return for the Dow-30 since January 2001 is 20.75%, not too bad. However, if the Dow components were weighted like the S&P 500 the return is a dismal 1.13%

“So, the only reason that the Dow is at new highs is the way they calculate the index. On a cap-weighted basis, the S&P 500 is actually doing better!”

Don’t get sucked in by the headlines. I see no reason to change my mind about thinking we’re in a secular bear market.

John Mauldin’s Thoughts from the Frontline

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