The Dow Jones 8,000 springboard

I read in an article in the Business Times last week that is rather interesting. The writer wrote about why the Dow seems to be unable to break the 8,000 level decisively in the last few months. Everytime the index closes below 8,000. it'll bounce right back up in the next few days.

So is this 8,000 level is bottom of the sea of crisis?

The writer goes on to point out that the reason for this is because the Dow is a price-weighted index - so therein lies the flaw. This means every dollar that a stock falls by will cause the Dow to fall 7.964 pts, regardless of the stock's capitalisation.

Now consider the big financial stock in the DJIA index - Citi (USD3.90), BOA (USD6.78), JP Morgan (USD25.43) - if all four financial stocks crash to nil, the index will lose only 300 pts, not much of a percentage loss in the Dow, but the consequences are unthinkable on the global economy.

The point is, big companies like the above mentioned and General Motors are already hitting rock bottom. Anymore bad news regarding these firms might not have that much of an impact on the DJIA and gives the impression stocks are holding up well.

Traditionally, when a Dow stock goes below USD 10, the stock will be taken out of the index to be replaced by another one. However, for some reason, this is not in the works, so we can conclude that the index is distorted in some sense.

My call for a small punt: buy DJIA futures from 7850 (Jan 09 congestion low). Take profit above 8,200