What Do Market Indicators Show?

One day in 1884, Charles Henry Dow averaged the closing prices of 11 stocks he considered representative of the U.S. economy in a paper that preceded The Wall Street Journal. By 1896, The Wall Street Journal was publishing its average on a regular basis, and the most famous indicator of stock market health was born: the Dow Jones Industrial Average.

The Dow Jones Industrial Average now indexes the value of 30 industrial stocks listed on the New York Stock Exchange and the Nasdaq stock exchange. All 30 are "blue chip" issues. Many have become household names: American Express, Boeing, Coca-Cola, General Electric, General Motors, Hewlett-Packard, IBM, Intel, Johnson & Johnson, McDonald’s, Microsoft, Procter & Gamble, Walt Disney, and Wal-Mart.

Of course, the Dow isn’t the only market indicator. There are a number of others that provide slightly different information.

The Standard & Poor’s 500 is an index based on a broad group of 500 stocks. Because some stocks influence the market more than others do, each stock is given a different weight when the calculations are made.

The AMEX Stock Exchange Composite Index is a capitalization-weighted, price-appreciation index that replaced the AMEX Market Value Index. It was introduced on January 2, 1997.

The National Association of Securities Dealers Automated Quotation system, or Nasdaq, lists over-the-counter market trades. The Nasdaq composite index tracks this market.

Probably the most broadly based market index is the Wilshire 5000 Equity Index, compiled by the Wilshire Associates of Santa Monica, California. It reflects the total market value of all stocks listed on the New York and American Stock Exchanges, plus many over-the-counter stocks.

Market indexes are useful for gauging the performance of an investment portfolio over time. If your portfolio substantially lags a corresponding index, it may be time for a change in strategy. Be sure to select an appropriate index as your benchmark. For example, comparing a small-cap stock portfolio to the Dow Jones Industrial Average may not be very meaningful. But comparing it to the Russell 2000 Index, a popular measure of the stock price performance of small companies, would be a more appropriate benchmark.

© 2006 Emerald Publications