Why do the indices of the DOW and S&P 500 move together?

Does this suggest manipulation and, if so, by whom?

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October 2016
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The Dow Jones Industrial Average, also called the "Dow," is an index of 30 large-cap companies that trade on either the New York Stock Exchange (NYSE) or the NASDAQ. Created by Charles Dow in 1896, the Dow originally had only 12 companies that were leaders in the industrial sector. The only remaining stock in the today's dow is General Electric. Over time, the index increased in size and breadth, although an index of 30 companies is still not large. The other unusual characteristic of Dow holdings is that the index is "price weighted." This means that more expensive stocks hold a bigger position in the index, and as a result, price movements in these stocks impact the Dow more.

On the other hand, the S&P 500 is an index of the 500 largest US companies that also trade on the NYSE or the NASDAQ. The S&P 500 is "size weighted" rather than price weighted. This means that larger companies hold a larger position in the index. This is an important distinction between the Dow and the S&P 500, and it explains why the S&P 500 is seen to be a closer proxy for the condition of the US stock market.

As you can see, both the Dow and the S&P 500 track large cap United States stocks. Because of this similarity, it's more unusual when they move differently than when they move together. These differences are easily accounted for by the weighting structures of the two indices.

If you are only going to follow one index, the S&P 500 is probably a better measure to give you a true sense of large cap stock movement; however, the Dow is so popular, it isn't going anywhere anytime soon!

Be Prosperous! Peggy 

October 2016
October 2016
October 2016
October 2016