We have done some earlier posts on Dow charts to illustrate the predicament today’s market is in. The utility of Dow charts (and the Dow as market proxy) is debatable, but the charts provide an interesting tool for overall market analysis. Below are the updated charts from January 3, 1900 to market close December 1, 2008.
Log Us Out of This Market
The first chart is the logarithmic chart of the DJIA from 1900-2008. Log charts are useful  in that they show proportional changes in the index over time. For instance, a change from 10,000-11,000 is the same as a change from 100-110, both are represented on the log chart as 10%. For those who put money to work in the market day by day (or year or decade), this is the chart for you.
For those in from the beginning . . .
And if you had money in the DJIA from 1900, here is the arithmetic chart, better for cash in – cash out measurements . For our time horizon, this would show you what happened to your dollar from 1900, or if you truncated the charts, what would happen to your cash over a shorter period of time.
I. Benefits and Disadvantages of the Dow
The Dow Jones Industrial Average charts are an interesting picture of the market. There are some benefits to using them in analysis:
- The index is made up of older companies with a long performance track record.
- The index itself is very old and has traded reliably so a good data set is available (and does not need to be historically extrapolated).
The disadvantages are:
- The Dow is price-weighted, not accounting for dividends, something critically important for market investors.
- The 30 industrial stocks are not necessarily key drivers of overall market performance (MSFT was left off for years and many foreign companies critical to global finance are not in the Dow).
We’ve done a number of earlier posts with Dow charts. For our earlier charts, please see Charts to Show That Markets Don’t Always Go UP!  and Dow Jones 1900-2008 Chart (Updated).  More important than charts, I’d like to close with the words of the immortal finance commentator Lou Rukeyser (from The Des Moines Register ):
“OK, let’s start with what’s really important tonight. It’s just your money, not your life. Everybody who really loved you a week ago, still loves you tonight. And that’s a heck of a lot more important than the numbers on a brokerage statement.
“The robins will sing, the crocuses will bloom, babies will gurgle and puppies will curl up in your lap and drift happily to sleep, even when the stock market goes temporarily insane.
“And now that that’s all fully in perspective, let me say, ‘Ouch’ and ‘Eek’ and ‘Medic!’ Tonight we’re going to try to make sense of mass hysteria, to look behind the crash of ’87, and most perilous but most important of all, to look ahead.”
. . . And that’s how it goes