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BASICS FUNDAMENTALS TECHNICALS ROLLING TC-2000 OPTIONS |
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Greetings, fellow Pro-fundity team members -
2-19-99 Page Background music:
Last week we considered some of the major indexes used to track the performance
of the market:
- Dow Industrial 30
- Standard & Poors 500
- Nasdaq Composite Index
- Russell 2000
These were designed to measure the performance of a section of the market, each for a different purpose. The Dow is a "price weighted average," meaning it is calculated by adding the stock price of all 30 stocks in the index. This number is then adjusted for changes in total shares represented, providing the number known as the Dow Jones Industrial Average. This is just a number, where other indexes are expressed in dollars. The Dow is not an average at all, but an index designed to express the health of the companies represented.
This index began in 1894 when it included nine railroads and two manufacturers. It has seen many face-lifts since that time, in 1997 when Hewlett-Packard replaced Texaco, Travelers Group replaced Westinghouse, Johnson & Johnson filled the spot left by Bethlehem Steel, and Wal-Mart did the same for Woolworth. Only one of the original 11 is still on the Dow today, General Electric, which has been bumped off the index twice in its history, in 1898, returning in 1899, and then again in 1901, reinstated in 1907.
A recent daily chart for the DJIA is repeated here to demonstrate the market activity as represented by these 30 companies for the past six months.
As we discussed last week, the Standard & Poors 500 is considered a more representative index of the general economy's health since it includes more companies in a broader range of the market. This includes 400 industrial, 40 utility, 40 financial, and 20 transportation companies. For this reason the S&P is more closely followed by market watchers.
The Russell 2000 is an index of 2000 smaller and newer U.S. companies listed primarily on NASDAQ. This makes this index more useful for the securities we feature on this page.
A recent daily chart for the Russell 2000 is included below to show how this index has viewed the market health the past 6 months.
These market indexes do provide broad help as we study the market and make investment decisions. However, just because the market is up, that doesn't mean all stocks will be up. To gain the greatest benefit from market indexes we need to target specific industries we are interested in. These are classified as sectors and can be found as sector indexes in most financial newspapers or in real-time charting programs.
For example, we will feature three sectors below for the same time frame as are listed on the Dow and Russell above. First lets consider the Computer Technology sector with the chart shown below.
This is somewhat mirrored in the Russell and less so in the Dow. The sharp increase in this index from mid-October until the 1st of February shows the strength of this sector during that time-frame. The correction in the Dow in December is hardly apparent in computers.
For a stark contrast, look at the Amex Oil Index during this time below. Can you see why investors should monitor the strength of the sector before making heady investments in oil? This is an easy task with sector indexes.
Lastly we will look at one more sector, the Philadelphia Semiconductor Index, which shows strength that follows the computer sector.
Sector indexes are easy to view on TeleChart 2000, with over 80 indexes in its data base. It is helpful to have a set of indexes that relate to industries or sectors of interest in a format that makes it easy to review at least weekly. This way we can be on top of market trends, in specific sectors in which we are considering investing our money. We may reconsider the timing of a stock purchase, putting it into more promising securities until the sector makes a turn to help us make more informed and profitable investments.
A short tutorial on putting appropriate sector indexes into a chart watch on TC2000 is available upon request.
It is our intent to help our readers understand market strategies well enough to make informed decisions and know the risks.
We provide TC2000 tutorials to members upon request. Next week we will consider strategies to maximize our returns. Stay tuned.
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