The Dow Jones industrial average is proving once again that it is not always the most reliable indicator of what the stock market is doing.
The widely watched average of 30 stock prices has become synonymous with the stock market, but in the past few days it repeatedly has climbed more steeply and plunged more deeply than other stock market indicators.
While the Dow dropped more than 22 percent on Monday, for instance, the Wilshire 5000-stock index favored by many professional investors was down a little less than 18 percent. At the same time, there was only about a 12 percent decline in the American Stock Exchange and the Nasdaq National Market indexes.
And the Dow rebounded more quickly, jumping almost 6 percent on Tuesday, while the Wilshire bounced back about 2.5 percent and the Amex and Nasdaq fever charts continued to fall another 9 percent or so.
Yesterday, the Dow Jones average roared back by another 10 percent, outpacing broader indicators that showed daily gains in the 8 to 9 percent range.
The disparate performances in stock market barometers reflect not only different methods of measuring the market, but also measures of different markets.
Many market experts take the Dow for what is: a benchmark of what is going on in a narrow strata of the bluest of blue-chip companies -- even though it is thought of as a universal indicator.
"The Dow is a rotten indicator," said Marshall E. Blume, professor of finance at the University of Pennsylvania's Wharton School. "It's one of the worst indicators around."
Among criticisms leveled at the Dow are that it is unrepresentative and tilted heavily toward manufacturing companies and Rust Bowl industries whose importance to the national economy has faded in recent years. Companies infrequently are deleted from and added to the list, critics say, leaving the Dow Jones average behind in a rapidly evolving economy.
Members of the industrial average include such heavyweight companies as Bethlehem Steel Corp., General Electric Co, General Motors Corp. and Texaco Inc. McDonald's Corp. is the only company from the burgeoning services sector on the list, and the lone financial services representative is Primerica Corp., which has been on the Dow since it was in a different business, as American Can Corp.
Besides the narrow composition of the Dow, there are complaints about how it is weighted and calculated, giving companies with high stock prices more presence in the average while important elements such as market capitalization are not taken into account.
In contrast to the 30 stocks in the Dow, the Wilshire index currently popular with many professionals includes 5,000 stocks. While the Dow was up 10 percent yesterday, the Wilshire gained 7.7 percent.
The Wilshire index includes all the stocks traded on the New York, American and other stock exchanges. "It includes everything they can get their hands on," Blume said. "I think of an index as measuring the rate of return that all investors in the market together obtain. The Dow Jones just doesn't do that." It has not been unusual in the past for the Dow to diverge from the broader market indexes that track the New York Stock Exchange and the American Stock Exchange. The performance of the Dow on Tuesday was a good example of this behavior: The Dow closed up while the Amex and Nasdaq indexes closed down.
One reason the fever charts moved in opposite directions, according to Alden C. Olson, a professor of finance at Michigan State University, was the reentry of institutional buyers and individuals into the market to buy Dow-listed stocks after Monday's scare.
"When they start to return to the market, they buy quality first because they feel safer there," said Olson. "That's typical." Since pension funds and other institutions rarely invest in stocks of small companies that are traded over-the-counter, their influence is reflected more in the Dow than in the Nasdaq index.
The performance of some of the other indexes diverges from the Dow because of the companies listed on them. On Tuesday, when the Dow went up and other measures declined, "The smaller and somewhat more speculative companies traded over-the-counter and on the Amex were still being sold because people were fearful," said Olson.
A more accurate to way to look at what the market did on a day such as Tuesday -- which was widely billed as a big rebound -- was to look at the markets' tallies of how many stocks declined and how many advanced. Many more stocks went down than up, suggesting it was not quite the rally that was indicated by the Dow.
Many experts also believe the Dow was widely distorted on Monday because of program trading, the computerized trading of large blocks of stock by institutional investors.
"Some of what happened on Monday and Tuesday reflected program trading," said David Wyss, chief financial economist for Data Resources Inc., an analysis firm.
Program trading, which plays off the differences in prices of stocks and stock index futures contracts, mostly affects the prices of big-company stocks.
The Standard & Poor's 500-stock index futures contract is the most widely used for program trading, and it includes all the companies in the Dow.
Whatever the shortcomings of the Dow industrial average, it continues to get more than its fair share of attention for several reasons.
For one, it has historical value. The first Dow was calculated on January 2, 1897, using the closing prices of 12 industrial stocks. The Dow has tracked 30 industrial issues since 1928, and has been mathematically adjusted over the years to maintain continuity. The Wilshire Index, by comparison, has been produced only since 1974.
That the Dow is published by the owners of The Wall Street Journal, the nation's leading financial newspaper, also gives it more currency and widespread dissemination.
Perhaps most important is the psychological value of the Dow. Investors like excitement and movement, and the Dow offers just that in very large numbers.
However, most professional money managers look to the Standard & Poor's index -- which dates to 1917, when it included 200 stocks -- for a reading on how the market is performing.
"Among institutional clients, the more popular general index is the Standard & Poor's 500," said Spero Kripotos, executive vice president of CDA Investment Technologies Inc. in Silver Spring. "It's a broader-based index, and they feel more comfortable with that." CDA's computers track dozens of other indexes -- including many developed by the company -- to help financial professionals gauge market activities.
Roland Machold, director of the division of investment for the state of New Jersey, said he does not use the Dow as an indicator to manage his $25 billion portfolio.
"It's like one of those things you stick on your thumb to take a reading," Machold said. "Our investment outlook is much longer-term."