The Dow’s losing streak showed its major weakness: chart of the week

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With a 0.04% gain on Thursday, the Dow Jones finally broke its 10-day losing streak, the worst since the 1970s.

This week’s performance was another reminder of why the historically important index is now more historically relevant than relevant, having long ceded its role to the S&P 500.

Before the market Dramatic reaction to the Fed On Wednesday, the Dow Jones was moving inversely to the S&P 500 and Nasdaq and it was In a state of historical funk.

A big part of the reason came from a dose of bad luck: While almost all of the Magnificent Seven stocks rose, the Dow Jones’ exposure was not to the two biggest winners — Tesla and Alphabet — and instead had Nvidia, which… It was a difficult month. (The Dow Jones recently added Nvidia in November, starting No Intel is struggling outside.)

On top of that, the Dow Jones had UnitedHealthcare, which fell about 20% this month, posting losses nearly double the second-worst performer, Chevron.

But this bad luck belies the “real problem,” which has been the index’s biggest advantage for many decades: its price-weighted indexing. Instead of using a market capitalization system, the index is calculated through stock prices, which only correlate to the actual valuation if you take into account the number of shares in existence. It’s great for the pre-internet era when you had to calculate quickly with little information, but now it offers some startling statistics, as our chart of the week shows.

For example, because it trades at roughly $500 per share, UnitedHealthcare ($452 billion market cap) has the second-largest Dow weighting at 7%. Microsoft, with a cheaper share price, comes in third place with 6%. But Microsoft is worth nearly seven times that amount.

You can do this for many of these things: Paint company Sherwin Williams is weighing about 1.5 times more than Apple and is worth just 2.3% of what the tech giant is.

And prices don’t just rank stocks for weighting purposes; They make them move differently. The $10 move is the same no matter which company we’re talking about, although it’s a massive 50% jump for a $20 stock and a much smaller 5% trade for a $200 stock. The pointer doesn’t care.

The Dow Jones is not the only index that uses this method. Japan’s Nikkei 225 is also price-weighted instead of using the market cap method which uses the total value of the components, weighted by volume.

Having this in the back of your mind is useful for analyzing headlines and statistics about the state of the market because every now and then we get another episode of “price weighted indexing error”.

The story continues