While we may not be able to call the precise top or bottom of a market trend, reverses in a market s direction are never one-day phenomena. And, oh what a difference it makes when you avoid a significant portion of the major bear markets. But before you judge the economy, the financial market or the performance of your investments on the basis of an index, it s important to understand what that index or any index - really represents. It s all a matter of what makes up an index. In November of 1999, the Dow added Microsoft, Intel, SBC Communications and Home Depot, dropping Chevron, Goodyear Tire, Sears Roebuck and Union Carbide.
Critics maintain the indices went too far in trying to include hot-performing new stocks.
Ironically, the old-line industrial firms have done better in most cases than the stocks that replaced them. To say that the DJIA is representative of all stock market activity is an overstatement. The DJIA is a grouping of 30 stocks of large, established, well-capitalized corporations. It is by no means representative of the more than 7000 companies traded on the major exchanges. Corp. s 500 stock index features 500 companies in 11 major industries.