The Dow Gets Hotter, Means Less

It’s a function of simple mathematics that the Dow Jones industrial average’s “big” days--up or down--are going to be less and less a big deal.

Without taking too much away from Friday’s surprising stock market rally--which pushed the Dow up 52.22 points to a record 4,035.61--some investors may be surprised to learn how little most of the Dow’s 30 stocks moved. Only five of the stocks rose more than $1 a share on the day. Half the stocks rose 50 cents or less.

Many investors are conditioned to think of a 50-point Dow move as dramatic, in part because the New York Stock Exchange still restricts high-speed computerized “program” trading when the Dow rises or falls that much--a trigger set in July, 1990.

But as the index climbs in value, 50 points just isn’t what it used to be. For example, at the 2,000 mark, which the Dow crossed for the first time in 1987, 50 points was a 2.5% move. At 3,000, first crossed in 1991, 50 points was a 1.7% move.

But now, at 4,000, 50 points is a 1.3% change in the Dow, which translates into 65 cents on a $50 stock.

What that means, of course, is that future “century” marks on the Dow are going to fall much faster in a bull market--but the money to be made won’t be quite what the headline hype might imply. Consider: The Dow need only rise 4% from here to reach 4,200. That’s a $2 move on a $50 stock.

In addition, because of the way in which the Dow is calculated, small percentage changes on the highest-priced stocks in the index can carry much more weight than larger percentage changes on the lowest-priced stocks. So if some of the recently hot high-priced stocks get hotter--like IBM (now at $81.125)--they could produce big daily point swings that won’t necessarily mean stock prices are rocketing across the board.