I have been recently hearing both sides of the coin on this one. Is the DOW really a good indicator, or is the S&P something more reliable in terms of measuring the economy? I was curious to see what the good people at ET thought about this.
Hmm I'd say they're an indicator of the supply and demand for stocks, not a perfect economic indicator. You could have the best economy & outlook for the economy... if nobody wants to buy or there's too much supply then prices will stay depressed.
Could I post something in your thread even though I'm not good. The DOW was invented to measure the movement of the stock market as a whole. While to measure the economy as a whole I think S&P is better suited since it holds widely divergent businesses. For a trader, they are the same; you rarely see a DOW Up with S&P500 Down and vice versa. They are congruent. PS: Don't say anything like that, really good people won't join; bad like me neither, you risk to have a dead thread.
The Dow is a narrow index which is skewed towards multi-national companies ( such as IBM and CAT ) that see a large portion of their earnings coming from a weaker dollar. I'd stick with the S&P.
Imo, it is a psychological indicator. For most people it is all they know about the market. Or it is a weather indicator. Sunny or cloudy economy. Or, a reproductive cycle indicator. This is not a good time to have children, the Dow is down. Some people use the DOW because it is easier to spell than SnP. The Dow is the leading cause of "Mad Dow Disease".
Excellent explanation here. http://seekingalpha.com/article/18041-djia-the-most-useless-overused-tool-on-the-planet
There is over a 97% correlation between the Dow and S&P. That being said, the S&P is a slightly better representation of the economy due to the inclusion of smaller market-cap stocks.