Averages & Indexes are ways
to track a particular market. Be it a stock, bond, options, or
commodities market, there is a proxy for that market that is
referenced as indicating the direction of that market at any
particular time.
THE DOW JONES AVERAGES
The DOW JONES INDUSTRIAL
AVERAGE - is the oldest and the most widely quoted market
indicator. Comprised of 30 "blue chip" stocks. The DOW was
originally computed by adding up the price of one share of
each of the stocks in the average and dividing that number by
30. As time has passed, the divisor has eroded down from 30 due
to stock splits, mergers and changes in the 30 listed companies.
The divisor is now about 0.1.
Listed every day in the Wall Street
Journal, the divisor, because of its low value, acts as a
multiplier. [Dividing a number by a fractional number increases
the value of the numerator.] Critics of the DOW say that the
divisor needs to be reset to a number above one. The shrinking
divisor is partially responsible for the volatility of the DOW.
DOW JONES TRANSPORTATION AVERAGE - (formerly the rail average)
Lists 20 transportation stocks. Average figured the same as the
DJIA.
DOW JONES PUBLIC UTILITY AVERAGE - 15 utility stocks. Divisor
computed the same as DJIA and TA.
The 65 STOCK AVERAGE - Comprised of the above three averages.
STANDARD & POORS 500 INDEX
STANDARD & POORS PRICE INDEXES - "The S & P 500"
Comprised of 400 industrial, 20 transportation, 40 public utility,
and 40 financial stocks. S&P publishes indexes that cover
capital goods companies, consumer goods, and common stocks. The
S&P 500 is the favored measurement of mutual fund portfolios
because it covers more companies than the DOW. Mutual fund
managers that supervise stock portfolios are held against the
S&P 500 to gage their performance.
The DOW Industrial, Transportation and Utility Averages with the
Standard & Poors 500 Index are the main market indicators that
are covered in finance courses. Other indexes and indicators
listed below are part of my notes.
HOW CAN WE BUY A SINGLE SECURITY (LIKE A STOCK) THAT WOULD BE THE
SAME AS BUYING AN ENTIRE INDEX?
Wall Street financial engineers are always at work inventing
marketable securities to fit investor's needs.
Stock Ticker Symbol DIA is a created share of stock that is traded
for 1/100th of the value of the DOW. If the DOW is now at 10,700,
a share of DIA will trade for 107. Investors wanting to own a
"piece" of the market or capitalize on market movements
can purchase a share or shares for a small initial investment.
Merrill Lynch invented an internet index share that tracks
the 20 largest internet companies. Ticker Symbol HHH performs like
a mutual fund of these 20 internet company stocks.
Check out Ticker QQQQ to track the NASDAQ 100.
AND Ticker SPY for the S&P 500.
WILSHIRE INDEX - Dollar market value of all NYSE and AMEX stocks
plus all actively traded OTC stocks. In effect, it is the total
price for stocks for which daily quotations may be obtained. It is
quoted in billions of dollars w/ a base of $1.404 billion set to
December 31, 1980.
VALUE LINE COMPOSITE INDEX - 1700 OTC/NYSE/AMEX stocks made by
Value Line Investment Survey. It is an equally weighed geometric
average of stock prices.
THE NEW YORK EXCHANGE INDEX - (or composite index) covers all
stocks on the NYSE. In addition, there are 4 sub-group indexes:
industrial, transportation, utility and finance. NYSE index uses
December 31, 1965 as a base with an index base of 50.
AMERICAN EXCHANGE MARKET VALUE INDEX - Originated in 1973. Covers
all common shares listed on the AMEX. Base period = August 31,
1973 with a base of 100. AMEX gives a relative change in changes
of covered securities.
NASDAQ INDEX - covers more than 3000 OTC companies, 7 indexes:
composite, industrials, Banks, Insurance, Finance, Transportation,
Utilities. Base period = February 5, 1971 at 100.
BOND MARKET INDICATORS - Invested when bonds started to show
volatility due to interest rate changes. Indicators used to
predict movements (capital gains) in bond prices. Moodys Bond
Yields - Spreads are studied between government (default risk
free) investments and corporate (or even junk securities). DOW
JONES BOND AVERAGES - Entire page printed daily in the WSJ on bond
trading and prices.
MERRILL LYNCH INDEXES
March, 2000
We were reminded of one other tool for managing volatility this
week, as Merrill Lynch announced that it had filed the paperwork
to form the eighth in its series of HOLDRs investment vehicles.
HOLDRs are baskets of twenty stocks that each focus on a specific
and limited area of the "new economy"; they trade like a
single security on the American Stock Exchange. Merrill introduced
the first of these exchange-traded portfolios last September when
it created its "Internet" HOLDR under the symbol HHH.
The company has since added Internet Architecture (hardware) under
IAH and Internet Infrastructure (software) under IIH, as well as
Telecom (TTH), Biotech (BBH), Pharmaceuticals (PPH), and B2B (BHH).
Despite being able to trade only in round lots of 100, these
market capitalization-weighted baskets have proven wildly popular
with technology investors.
Merrill's next HOLDR will be a monster. The ticker BDH will be
used to trade a basket of twenty broadband stocks, positioned
right at the very heart of the Internet-go-Faster (IGF)
revolution. According to the prospectus, Merrill is defining
"broadband" as companies that "develop,
manufacture, and market products and services which, among other
things, facilitate the transmission of data, video, and voice more
quickly and more efficiently than traditional telephone
communications." An astounding number of these stocks already
appear on the Rightline play list. The included stocks are LU, NT,
MOT, QCOM, JDSU, BRCM, GLW, SCMR, AMCC, TLAB, TERN, PMCS, CMVT,
SDLI, SNXT, NXTL, RFMD, SFA, CIEN, and CMTN. We're certain BDH
will take off when it comes to market, but look for a runup in
these companies as professionals and brokers load up in advance of
BDH's introduction.
