Ignore the Dow

Unless it’s across 10,000, I haven’t paid attention to the Dow in years. The S&P 500 is by far the better index. On top of that, consider this stunning fact: Caterpillar’s stock is responsible for 40 percent of the Dow’s climb since the beginning of the year. That’s crazy!

If not for Caterpillar Inc., the world’s most widely-followed stock index would be up just 2.5 percent this year instead of 4.1 percent. Take out gains from the next three biggest contributors to the index — McDonald’s Corp., DuPont Co. and Boeing Co. — and we would be sitting on losses.

“It’s all about Cat,” marvels BNY ConvergEx strategist Nicholas Colas in a recent report. “Names like Microsoft, Cisco, Bank of America and Intel might be large companies but as far as Dow impact goes, they are tiny.”

The difference is that the Dow is weighted by price. To compute the Dow, you add up the 30 stocks and divide the sum by a divisor (currently 0.132129493) and, bingo. The S&P 500, however, is done by adjusting by the actual market value of each stock which makes much more sense.

Posted by on September 26th, 2010 at 6:19 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.