The Dow-Jones averages

Press, 19 August 1982, Page 28

The Dow-Jones averages

The Dow Theory is the granddaddy of all technical market studies. Although it'is frequently criticised for being “too late,” and occasionally derided (particularly in the early stages of a Bear

Market) by those who rebel at accepting its verdicts, it is known by name to nearly everyone who has had any association with the stock market, “and respected by most. Many who heed it in n greater or lesser degree in | determining their investment policies never realise that it. is purely and simply "technical.” It is built upon, and concerned with nothing but, the action of the stock market itself (as expressed in certain "averages”), deriving nothing from the business statistics on which the fundamentalists depend. There is much in the writings of its original promulgator, Charles H. Dow, to suggest that he did not think of his “Theory" as a device for forecasting the stock market, or even as a guide for investors, but rather as a barometer of general business trends. Mr Dow founded the Dow-Jones financial news service, and is credited with the invention of stock market averages. The basic principles of the theory, which was later named after him, were outlined by him in editorials he wrote for the Wall Street Journal. Upon his' death in 1902, his successor as editor of the Journal, William P. Hamilton, took up Dow’s principles .and, in the course of 27 years of writing on the stock market, organised them and formulated them into the Dow Theory as /-we know it today.

Before we proceed to any explanation of the theory itself, it will be necessary to examine the stock averages which it employs. Long before the time of Dow, the fact was familiar to bankers and businessmen that the securities of most established companies tended to go up or down in price together- Exceptions — stocks which moved against the general financial tide — were rare, nor did they as a .rule persevere in that contrary course for more than a few days or weeks at a time. It is true that when a boom was on, the prices of some issues rose faster and farther than others, and when the trend was towards depression some stocks declined rapidly while others would put up considerable resistance to the forces that were dragging the market down — but the fact remained that most securities tended to swing together. (They still do, needless to say, and always will.) : This fact, as we have said, has long been commonly known and accepted — so completely taken for granted that its importance is usually overlooked. For it is important — tremendously important from many angles. One of the best of all reasons for a student of market technics to start with the’Dow Theory is because that theory stresses the general market, trend. Charles Dow is believed to

have been the first to make a thoroughgoing effort to express the general trend (or, more correctly, level) of the securities market in terms of the average price of a selected few representative stocks. As finally set up in January of 1897, in the form which has been continued to date, and used by him in his studies of market trends, there were two Dow-Jones averages. One was composed of the stocks of 20 railroad companies only, for the railroads were the dominant corporate enterprises of his day. The other, called the Industrial average, represented all other types of business, and was made up at first of only 12 issues. This number was increased to 20 in 1916, and to 30 on October 1. 1928.

The stocks included in these two averages have been changed from time to time in order to keep the lists up-to-date and as nearly representative as possible of their respective groups. It is interesting to. note that the only railroad stock which has been included in the Rail average continuously from 1897 to 1956 is New York Central. Only General Electric, of the present 30 industrial stocks, was included in the original Industrial average and that was dropped at one time (in 1898) and subsequently reinserted. In 1929, all stocks of public utility

companies were dropped from the Industrial average and a new Utility average of 20 issues was set up; in 1938 its number was reduced to 15. The 20 rail, 30 industrial and 15 utility stocks are nowaveraged together to make what is known as the DowJones 65-Stock Composite. It remains only to add that the. Dow Theory pays no attention to the Utility or Composite averages: its interpre-. tations are based on the Railand Industrial averages only. (Although the specific DowJones averages are always . used in this connection, the Theory would presumablywork "just as well with any. other equally representative indexes of railroad and industrial stocks.)

In recent years the values of the Dow-Jones averages have been computed for the end of each hour of trading as well- as the end of the day. These hourly figures are published ft the Wail Street. Journal as well as on" the Dow-Jones news ticker service. The Wall Street Journal also prints in each issue a summary of the important highs and lows of each average by date for the preceding two "or three years. Their daily closing prices are reported in many other metropolitan daily newspapers.

The Dow-Jones averages are regularly printed in “The Press” in the indices column.