Saturday, October 11, 2008

the dow tanking

i just made some rough calculations and it looks like the dow lost about 60% of its value in the past year or so. I think this has been the largest percentage decline in history in the course of a year. Moving that cool little chart on it looks like the only other time something like this happened was in 73-74 but that took two years! WOW.

What's MORE IMPORTANT is the S&P 500 which tracks a much wider variety of stocks. The Dow Jones Industrial Average) DJIA only tracks about the top 30 stocks of the largest companies. The S&P 500 tracks, you guessed it, 500 stocks across a range of industries. That's a better thermometer of what's going on in the economy. Think about it like this, its the difference between measuring in feet (DJIA) or inches (S&P 500). If you're going to build a bridge, you better have some really small measurements. I do think that the S&P has a wider index, but its not followed as much because there are mutual fund indexes that closely follow the S&P 500 (they're called 'spiders' -S&P InDexeRs).

I also think that one of the problems with the market's growth since the nineties was the creation of automated buy-sell programs that fund managers and perhaps enterprising individuals created that would buy stock at a certain price and sell it at another. This enables you to set a rate of return with a long window without looking at the short-term.

I also wonder what has happened to the prohibition on short-selling stocks. The other day i saw a comment about margin calls but i'm note clear as to whether the margin calls are related to short selling, i gotta investigate that.
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