Taken as a whole, the stock market usually is not a great leveler that gives everyone an equal return on investment. Rather, for the most part, various industrial sectors differ widely from each other over the months. This disparity ordinarily would be disclosed in the separate fortunes of different averages -- the Dow Jones Industrial Average for the industrial blue-chip sector and NASDAQ for speculative issues, for example. But what is fascinating about the year-end of 1983 is how each of the indexes that INC. tracks is approaching the other in terms of 12-month change. Following a relatively wide dispersement barely 5 months back, when the difference between the Hambrecht & Quist Technology Stock Index and the DJI was 38 points (starting from a common base zero in May 1982), the gap narrowed to only 8 points among all the indexes except INC.'s. That means, incredibly enough, that a year's investment in the stodgy Dow Jones Industrials fared nearly as well as one in H&Q's 120 or so high-tech young glamour stocks, 28% vs. 36%, respectively. (Alas, an investment in the INC. 100, however, is outside this tight gathering, and is at a loss 27 points below the DJI.)

But you can't "buy" the DJI without a whole lot of fuss, because it is a so-called "weighted" average. The value of each stock's price change differs from the others according to what, over the 88 years since the index was first constructed, has become a very complicated formula. Thus, acquiring the proper fraction for true representation in the Dow "portfolio" is virtually impossible, and no broker in his or her right mind would attempt it.

And even if he or she did, the DJI would not represent the overall market, despite the popular reliance on how much the Dow gained or lost. Thinking that the market is in good shape because the DJI is performing well can be a catastrophic assumption. A prime example of how the Dow can diverge from other averages -- partly because it is weighted, and partly due to the individual companies involved -- was shown this past fall. In late November, nearly 16 months after the bull market began in August 1982, the DJI set an all-time high at 1,287.20. The New York Stock Exchange Index, however, didn't even come close to new high ground, which it had set way back in June. Not only that, but it didn't recover to the heights of an earlier rally that fizzled in October. So even while the DJI was technically looking powerful and spreading renewed faith in the bull market among the faithful, the NYSE was failing badly. The picture was further complicated by the more speculative American Stock Exchange, whose index performed even worse than the NYSE's. The Amex set an all-time high in late July, failed badly in an October rally, and then immediately dipped below its 200-day moving average -- one definition of a bear market; a late November recovery was unimpressive. Which index was showing the true condition of stocks?

In this particular period, the answer was strongly suggested by each exchange's difference between daily new highs and daily new lows. If the DJI was truly strong as it went into new high ground, advances should have surged over declines, at least on the conservative NYSE. As it was, however, they barely remained even with them. An examination of this factor disclosed, like a pile of carpenter-ant sawdust, even more suspicious weakness. On the NYSE, the difference between new highs and new lows reached its peak not in June, when it set its high, but in mid-May, some five weeks earlier. That means that as the NYSE Index established a record, not so many individual issues were celebrating as before. And when the NYSE Index again returned to new-high territory in October, far fewer went along. Under the cover of rising averages, the stock market was losing its steam. On the Amex, highs versus lows were even worse. In mid-October, as the DJI was setting its then-all-time high, individual new highs and lows were at a standoff. A market cannot be said to be as healthy as the DJI suggested when an important component -- in this case, secondary issues -- is limping so noticeably. More often than not, a lackluster performance on one front spreads to many others; it does not cure itself.

A similar area of technical revelation, in which the market could be seen to be weakening internally, came in advances versus declines. This statistic peaked in June for both NYSE and Amex stocks. Subsequent rally attempts after that saw fewer gainers and more losers -- as many bewildered stockholders could testify. But then toward year end, as prices on the NYSE were tumbling predictably (after the Dow set a record high, it fell on 8 of the next 12 days), the Amex firmed up. A return of investor interest in speculative stocks seemed to be underway, lending some hope for a recovery in the INC. Index. For those who were alert to it, the sign was that, on down days, the Amex Index was declining proportionately less than the DJI.

The market's ups and downs over the last two months of 1983 seemed bewildering, but actually they weren't. All the indexes have to be pried up and examined from underneath, because it is what is scurrying around below, and in what direction, that really counts.

Published on: Feb 1, 1984