Technical Analysis

Charles Dow

Charles Dow (1851 – 1902) was an American journalist who co-founded Dow Jones & Company and The Wall Street Journal, which became the most respected financial publication in the world. He was the first editor of the Wall Street Journal, and the inventor of the widely known and quoted Dow Jones Industrial Average. He is also known for his technical analysis work, which is now called Dow Theory.

Dow Theory was based on analysing the general swings in the market, with the aim of identifying the general trends. A lot of his work underpins modern technical analysis studies.

Dow first developed the idea for a stock market average because he observed that most stocks moved together in the general ups and downs of the market. He along with Edward Jones and Charles Bergstresser founded Dow Jones & Co. in 1882.

Originally, the first averages that they calculated were not published in the Wall Street Journal, but actually in the publication that came before the Journal called the Customer’s Afternoon Letter. Initially, the focus of the averages was growth stocks and not industrial companies, and no industrial stocks were included in the averages. At the time towards the end of the 19th century, the growth stocks were mainly transportation companies.

The original Dow Jones Index comprised of 11 stocks. The 11 companies were made up of nine railroad companies, a steamship line and a communications company. This index eventually became the Transportation Average.

On 26th May 1896, Dow split the industrial and transportation companies into two different averages, which established what is known today as the Dow Jones Industrial Average (DJIA).

The DJIA covers only 30 large companies listed on the New York Stock Exchange and the NASDAQ, whereas there are thousands of companies listed. There are a number of criticisms of the DJIA including the selection criteria used for the companies in the Average.

The constituents are subjectively selected by the editors of the Wall Street Journal. Over the years, companies in the index have been changed often, to reflect changes in the US economy. For example, sometimes a poorly performing company has been replaced by another in the DJIA, from an emerging sector.

The DJIA doesn’t necessarily accurately reflect the performance of the general US markets because it is based on the performance of 30 companies, yet it is widely quoted as the general market index. An index that captures more of the general market performance is the S & P 500 Index which is based on 500 companies.

The companies in the DJIA include IBM Corp, Microsoft, 3M Co, Proctor and Gamble Co, Caterpillar Inc, Boeing Co, Johnson and Johnson, Coca Cola Co, and Wal-Mart Stores Inc. Interestingly, of the all the initial companies included, only General Electric remains as part of the present day DJIA.

Charles Dow was urged to document some of his theories by S.A. Nelson who tried unsuccessfully to convince him to write a book. There are a few Wall Street Journal editorials that he wrote in 1901 and early 1902 just before his death. Nelson republished them in a book in 1903 and was the first to coin the term ‘Dow Theory’.