Thursday, June 4, 2009

How accurate is the Dow?

The Dow Jones Industrial average has been reworked again to reflect the bankruptcy of GM. Both the Dow and the S&P 500 are periodically changed when something happens to one of their constituents. The selection process for the new stocks that are added to the indices is a bit of a black box, but one thing appears to be true - both indices may inadvertently engage in a buy high sell low strategy. In effect the stocks that are deleted are ones that have been beaten down, while the stocks that are added are often stars in their sector. Evidence for this is explained here in a nice article on seeking alpha

I blogged about this before, and more I think about it, I think there must be a market for a pure buy and hold mutual fund.