Tuesday, July 19, 2011

Uh oh: The DJIA's Highest Priced Components Are the Ones That Are Up (IBM; DIA)

From our March 6, 2009 post "Manipulating the Dow Jones Industrial Average" (three days before the bottom):
Back in the bad old days, the specialists* in the Dirty Thirty would move their own books around to their personal benefit but from time to time would coordinate their efforts.

The classic move would be to position for a decline while giving the impression to the investing public that "Hey, the water's fine, come on in".

They would do this by shorting the lower priced DJIA components while maintaining the higher priced stock, or even taking those up a bit.

When the trap was sprung, those higher priced stocks would be collapsed, triggering stop loss limit orders to feed the fear, and nary a specialist bid in sight. As the ticker spread the story to the country, the sell orders would come pouring in and accelerate the down move. Then the margin calls would go out, literally stripping stock from the accounts of the unwary.

This history came back to me as I watched IBM today. Big Blue is the highest priced stock in the DJIA. It was down $1.67 to $85.81. The current divisor is 0.1255527090 which means a $1.00 move in any component stock is worth just under 8 points on the index.

Thus a 1.16% move in IBM is worth as much to the index as a 97% move in Citi (closed at $1.03).

If these were the bad old days, and one were looking for the opposite move, up rather than down, then one would look for a way to paint a negative picture, perhaps by taking a high priced stock down while the lower priced issues were firming up.

That's how they used to do it in the old days*....
Today the leading gainer is the Dow's highest priced issue
International Business Machines up $7.27 (4.15%) equal to 55 of the 129 the index is up.(12,514)