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Market Indicators - Do You Care?

By Ken Little

"And in business news this afternoon, the stock market just closed with, the Dow down 863 points in heavy trading. This just in! Police are reporting a large number of people threatening to jump off downtown skyscrapers. We'll bring you more on this story as it develops."

"We have a correction to our previous business story. The Dow actually closed down 86.3 points."

Why do so many people seemed concerned about the Dow (Dow Jones Industrial Average)? And should you be?

The Dow or DJIA is one of many market indicators you will read and hear about as you become more familiar with investing. It is one of the oldest and best known and the one most people know or think they know.

We will discuss five indicators in this article, but be aware that there are hundreds of indicators that regularly track investments. Each of these indicators looks at the market in a different way. It is important to note that the most indicators are an index and not a dollars and cents figure.

The five we will look at today are:
Dow Jones Industrial Average
Standard and Poor's 500 Index
Nasdaq Composite Index
Russell 2000 Index
New York Stock Exchange Composite Index

The Dow Jones Industrial Average (DJIA) or (Dow)
It may surprise you to learn that the Dow reflects just the activity of 30 stocks. These are "blue chip" stocks and considered important leaders in the economy. The prices of these stocks are averaged and the results move the Dow up or down.

New Terms
Index - an index is a statistical measure which marks change from a base period. For example, the base for the NYSE Composite Index was set at 50.00 on December 31, 1965, according to their website. Every time there is a trade on the New York Stock Exchange the index is re-calculated and adjusted up or down relative to the base.

Blue Chip Stocks - these are high quality companies with lengthy histories of stability and growth.They are considered "safe investments" and are often found in portfolios of institutional investors who are more concerned with preservation of capital than growth.
Although the sample is small compared to the thousands of equities on the market, the Dow is a widely watched barometer of economic health. If the Dow is rising, many consider that an indication of a strong economy, while a falling Dow may indicate weakness.

The Dow is actually a better "wet finger in the wind" indicator than a predictor of long term economic trends. If the Dow is sharply off one day, it doesn't mean we are headed toward a recession. Likewise, a strong upswing doesn't necessarily mean the economy is in a strong growth mode.

In daily trading, the Dow may be a better measure of the emotion of the market than an indicator of long-term trends. Over a long period of time, a fairly steady movement in one direction may in fact reflect the economy's health. The Dow Jones Company, publishers of the Wall Street Journal, owns the DJIA and is responsible for computing it.

The Standard and Poor's 500 Index (S&P 500)
The S&P 500 is another widely-know indicator. The Standard and Poor Company is a highly respected financial services company providing a wide variety of ratings and indexes. The S&P 500 is one of the most widely used measures in the market.

A committee selects the 500 companies for the index and monitors their status. The stocks are large companies and recognized leaders in their sectors.

The S&P 500 is considered by many to be the most accurate measurement of market activity. Many in the investment community measure their success or failure by whether they beat the S&P 500 or not over a period of time. Many do, but few do it consistently over time.

Not surprisingly, there are many index mutual funds that try to mimic the S&P 500. Since most of us can't afford to own 500 individual stocks, these funds are very attractive.

Nasdaq Composite Index
The Nasdaq Composite Index reflects all the stocks traded on the Nasdaq Stock Market, which makes it one of the broadest based indexes. As of this writing there were 5,005 stocks in the index.

The Nasdaq index is an important indicator for several reasons, but the most popular reason is that it contains many smaller, newer companies and companies in the high tech industries. The rampaging stock market has turned some of these small companies into giants almost over night.

The Nasdaq Stock Market was formerly known as the National Association of Securities Dealers Automated Quotation System, but now is just the Nasdaq. It was the first electronic market and is now the second largest market in the world based on dollar volume.

While the S&P 500 may be one of the most accurate indicators of large companies, the Nasdaq is the champ for smaller companies. Because its index is reflective of the complete market, it might be better compared with the New York Stock Exchange.

Russell 2000 Index
The Russell 2000 Index measures the performance of small companies. Computed by the Frank Russell Company, the 2000 index is just one of many indicators produced by the company. The company became a subsidiary of The Northwestern Mutual Life Insurance Company in January 1999.

While much media attention is focused on large companies, smaller companies, like those found in the Russell 2000 often account for much of the employment growth nationally. You will also find many high technology companies in this index.

The Russell 2000 and the company's other indexes are used by money managers and private investors to measure performance of their portfolios.

New York Stock Exchange Composite Index
The New York Stock Exchange Composite Index is an average of the price changes of all the common stocks listed and traded on the New York Stock Exchange, according to their website. The New York Stock Exchange is the oldest and largest securities market. The NYSE traces its beginnings to 1792.

The NYSE Index is the only indicator that measures the whole New York Stock Exchange, making it an important indicator for larger companies. The exchange has strict rules for member companies regarding financial reporting and accounting. Companies that fail to meet its standards can be "delisted" or removed from the market.

Conclusions
While these and the many other market indicators are important to watch, you should keep it all in perspective. Successful investors are in for the long term and, don't abruptly change their holdings because one indicator or the other rises or dips.

On the other hand, you should be watching how your investments compare to the indicators. Mutual fund holders usually see this comparison in fund literature. If the fund(s) you are holding are going down while relevant indicators are going up over a period of time, it may signal a change is in order.

The indicators can also be helpful when choosing an investment. How has it done over the past five or ten years compared to the relevant indicator? Although past performance is no guarantee of future success, it does give you a way to measure mutual funds and compare them to other comparable funds.

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