Tuesday, March 23, 2010

The Dow Jones Marketing Index


I think some people believe the Dow Jones Industrial Average has something to do with stock performance. That's not exactly the case. The Dow is a sales gimmick, a trick that is played on people to steal their money. Take the following quiz to see if you understand the DJIA:

Directions: Please assume nothing changes exept the Dow components in question, then pick the BEST answer. Don't scroll down until you are finished, the answers are listed below.

1.) If Citigroup stock went to $0 tomorrow, the Dow would:
a. Not change
b. Drop 360 points
c. Drop 180 points
d. Drop 712 points

2.) Citi stock goes to $0, at the same time IBM announces a new CEO and rises 4%, the Dow:
a. Goes up
b. Goes down
c. Stays the same

3.) GM was replaced by Cisco on June 1, 2009. On June 2, 2009, Cisco needed to climb ___% to equal the effect of GM's stock plunging -50% just a few days prior.
a. 3
b. 115
c. 50
d. 200

4.) If Microsoft stock goes from $30 to $60 tomorrow, the Dow will climb:
a. 135 points
b. 410 points
c. 40 points
d. 1,200 points

5.) If every Dow component rises $1 tomorrow, the Dow will rise:
a. 240 points
b. 30 points
c. 300 points
d. 90 points

6.) Which relationship is true with respect to making the Dow move:
a. Alcoa + BofA + Citi+ GE + Intel + Kraft + Pfizer = IBM
b. J&J = Kraft
c. Citi + BofA = JP Morgan Chase
d. Caterpillar + Chevon + Disney = Exxon

7.) If a given Dow component falls today:
a. Tomorrow it is weighted less
b. Tomorrow it is weighted more
c. Tomorrow it is weighted the same

8.) How many of the original Dow components are still part of the Dow?
a. 0
b. 1
c. 7
d. 12

9.) 3M is 5 times more important than Pfizer.
a. True
b. False

10.) If 3M goes from $82 to $83 at the same time Pfizer goes from $17 to $16:
a. The Dow will not change
b. The Dow goes up 50 points
c. The Dow goes Down 50 points

I added one more question to clarify a comment...

11.) If 15 of 30 Dow components go down 1% per day, and the other 15 components go up 1% per day, after 30 days the Dow would
(hypothetically assuming all Dow components started out equally weighted, and the index started at 10,800):
a. Go up to 11,240
b. Go down to 10,400
c. Not change





































































Answer (a) is always correct.

16 comments:

  1. So if the DOW is up the stocks not in the DOW are not. I think the DOW is just a barometer of the current market at all times. Sure, companies come and go, but you can still use the DOW as an indicator of how things are doing. If you would rather, you could look at the S&P or the Wilshire, but you will see the same thing, markets making new recent highs together. Steel and tech should continue to do good in this market. More jobs means more profits and more expansion needs more steel. Can you label your current count on a real chart? I have is a wave 4 with wave 5 about to propel us to the next levels, 1200-1250 before the end of the month. I like tech and commodity names still, obviously. As long as bond yields are low, the government can keep borrowing money and the FED can keep printing to buy those bonds. This is all very inflationary and can be seen in the liquidity flooding the equity market looking for safety. Until the government is unable to fund new debt due to higher interest payments we should see continued higher prices across all markets.

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  2. Check out a weekly chart of CRM. his is why there is no money in shorting the market. As long as you average down you are able to at least double your money every few years going long only

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  3. I agree, but even with other items, such as gold, I believe that the masters control the price for their sole benefit.

    Not the slaves.

    ReplyDelete
  4. "So if the DOW is up the stocks not in the DOW are not. I think the DOW is just a barometer of the current market at all times. "

    It's more complex than that. For example, when a low priced component is replaced by a high priced component, the new component will only need to go up a few percent to have the same impact on the Dow as if the old component doubled in price. (ref: question 2 & 3)

    Basically, the Dow is price trickery designed to magnify the effect of the upward movers and de-magnify the effect of the downward movers.

    I added Question #11 to illustrate how biased the calculation rules are is towards gainers

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  5. "Marketing Index"

    How true it is.

    Thanks for the reminder.

    ReplyDelete
  6. Now your starting to get a taste of what I am talking about. Price action is always ahead of volume. In the next week or so we should see some 200 point up days in the DOW on high volume. After we get into the mid 11000 area you may be able to nibble on some shorts.

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  7. FDRAOA, if you get the time, can you please explain your rational for low volume comments.

    In terms of years, current volume does not look all that bad. Actually, it looks normal to good the way I see it.

    Thanks.

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  8. Awesome day, nice bottom call on the health care post the other day.

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  9. One of the biggest buy signals yet. I love the part about, go ahead " short away"...LOL

    http://fdralloveragain.blogspot.com/2009/10/dow-9918-was-it.html

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  10. If the Federal Reserve buys 2.5 trillion in worthless assets from insolvent institutions, and those institutions take that 2.5 trillion and buy stock.

    a. It doesn't matter
    b. It doesn't matter
    c. The market is a joke because there is no market without a backing by a money printer (Fed)
    d. All of the above

    The statement "don't fight the fed" is relevant. It really, truly is a waste of time to fight against a money printer. If they want inflation, they will have it. If the market starts going down they will just pull the same thing again.

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  11. mish claims bank reserves are irrelevant:
    http://globaleconomicanalysis.blogspot.com/2010/03/bernanke-wants-to-end-bank-reserve.html

    what do you think? i know you say the fed funds rate (the rate on reserves) determines whether the banks can lend profitably (by where it is relative to the IRX).

    ReplyDelete
  12. "mish claims bank reserves are irrelevant:
    http://globaleconomicanalysis.blogspot.com/2010/03/bernanke-wants-to-end-bank-reserve.html

    what do you think? i know you say the fed funds rate (the rate on reserves) determines whether the banks can lend profitably (by where it is relative to the IRX)."

    Mish posts some interesting things. I don't believe reserves are irrelevant for the simple reason that our market remains, for the time being, totally dominated by commercial self-interest.

    If you want to really know what bank reserve requirements are, just surmise an avg money-down rate. Banks will generally force the customer to self-finance their own loan.

    In other words, if it generally takes 20% down to get a mortgage today, when it took 5% or even less in 2006, then commercial reserves are on the increase, no matter what they Fed "allows."

    ReplyDelete
  13. "The statement "don't fight the fed" is relevant. It really, truly is a waste of time to fight against a money printer. If they want inflation, they will have it. If the market starts going down they will just pull the same thing again."

    I agree with that in general, but disagree that the Fed can print money, they can't.

    Look no farther than the plunging "money" supply over the past 2 years+ as proof.

    The fundamental difference between a Weimar-style gov't money-printing meltdown and the good ol' USA is that our mega-corruption is all done for personal profit. That's capitalism, baby.

    In other words, the Fed never "prints" counterfeit cash, they "sell" counterfiet cash. That is why every central bank-induced depression in the USA (at least 5 big ones; the "Great Depression" being the smallest) have all been massively deflationary.

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  14. "Mish posts some interesting things. I don't believe reserves are irrelevant for the simple reason that our market remains, for the time being, totally dominated by commercial self-interest."

    but if Bernanke is proposing to eliminate reserves completely, doesn't this invalidate your position that the fed "wholesales" cash to the banks for profit? the reserves *are* the cash that the fed wholesales, correct?

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  15. "but if Bernanke is proposing to eliminate reserves completely, doesn't this invalidate your position that the fed "wholesales" cash to the banks for profit? the reserves *are* the cash that the fed wholesales, correct?"

    Eliminating a reserve requirement doesn't mean banks don't need reserves when people come a knockin'. Like I said above, if banks are requiring more money down, they are building reserves. No one really cares what the Fed says about anything, they are just an incredibly expensive nuisance.

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  16. "Eliminating a reserve requirement doesn't mean banks don't need reserves when people come a knockin'. Like I said above, if banks are requiring more money down, they are building reserves. No one really cares what the Fed says about anything, they are just an incredibly expensive nuisance."

    Last question on reserves: isn't the fed *paying* banks to hold reserves now? They can borrow fed funds at less than 0.25 and the fed pays them 0.25. How does the fed make a profit from this? Seems like the banks (aka "the users") do.

    ReplyDelete

The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

 
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