I feel there are very few people, including investors and traders, who know just what the Dow divisor is and exactly what its implications are in regard to investor psychology.
Well, what is it? The Dow divisor is a calculation used to arrive at the Dow Jones Industrial Average. It is obtained by the sum of the price of the thirty Dow components, and then dividing the figure by the divisor. The divisor is a figure that has changed dramatically over the years to reflect stock splits, spin-offs and the various changes of the Dow components over the years.
The current Dow divisor as of August, 2015, is 0.14602128057775. Therefore, if you add up the thirty Dow stocks and divide by the Dow divisor you will arrive at the Dow average. About 18552 at the end of the day, August 19,2016. In August of 1976 the Dow divisor was 1.504. You may say, so what? But think of this. The Dow is still widely watched and used as a gauge by investors all over the world. Television programs, such as those on CNBC, and the financial media, will loudly and dramatically broadcast the Dow average all day long, especially when it is way up or way down. But here’s the thing:
You will often hear people, investors, say you can’t compare the market of then, with today’s market. It used to move in the 1970’s 7-15 points and that was considered a decent move. Today it regularly moves 100-200 points. However, if GE or an equivalent Dow stock moved up or down three points in 1976, that is absolutely no different than if GE moves up or down the same three points today. To someone holding or trading this stock, the profit or loss would be exactly the same. And trust me, stocks in 1976 moved up and down just as much as they do today.
But here’s the rub, and how the exchange and the corroborating media outlets play with investors heads because of the Dow divisor. In 1976, if a Dow component moved one point, the Dow average would move .66 of one point. 1 divided by 1.504 ( the 1976 Dow divisor), and you get .66. Therefore, if all thirty Dow stocks moved up one point in 1976, the Dow Average would be up 19.95 points! It moves that much in minutes today back and forth. Today, if all thirty Dow stocks move up one point, the Dow average goes up 200 points!! The exact same movement in Dow stocks, creates a difference of 180 points in the Dow average 40 years later.
Along with the media control they have, the exchange can utilize the Dow average in order to condition investor psychology, whether negative or positive, to help in accomplishing their goals. It would only take a drop of 150 Dow component points,( 5 points per Dow stock), to cause a 1000 point decline in the Dow average! This will be loudly proclaimed as Armageddon on the news outlets and will have an influence on investor psyches. The Dow average is basically used as a psychological hammer or euphoric drug by the exchange, which helps them achieve the buying and selling for their accounts.
This is something to ponder as we head into the future with these extremely high averages, wherein 500-1000 point moves will be more commonplace, and the divisor will most likely shrink even more, enabling the exchange to sweep people either out of the market or draw them in like a stampede, thus more easily attaining the desired goals of the insiders.