As to how good the Dow is as a representation of the market as a whole, the answer is: Not a lot. It does usually match the trend of the market, but not with any exactitude; roughly 80-85% I'd say. For that, you want something like the Wilshire 5000 Total Market Index. What the Dow is best at is showing the current trend compared to the history of the Dow. And since the Dow is what most people have followed all their lives, it is probably the best way for them to get a quick-fix on the general direction of things.
But the Dow certainly can get completely out of line with the rest of the market in the short-term. I remember a few months ago when some Dow component - I think it was Intel, but I don't remember for sure - announced bad earnings the night before, and immediately upon the first trade of that stock, the Dow plunged something like 480 points. Even though all the other stocks in the Dow had barely moved at all. (It came back pretty quickly though; definitely a buying opportunity there.)posted by aaron at 11:13 PM on January 1, 2001
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