Hi:

I have some measure of familiarity with the Dow and S & P 500 - enough to get me in trouble. I do not understand the NASDAQ and how it relates to the DOW, etc . . .

From what little I know about the NASDAQ and the commercials I've seen, I gather that the NASDAQ is made up of primarily tech stocks. Now, we all know tech stocks are holding up the market(s). So, my question is, if the NASDAQ were to bomb out, would it necessarily take the DOW with it (all other factors being equal - i.e. - no outside interference to keep the DOW up)?

Thanks, Rob

-- robert bright (roosterbos@go.com), February 01, 2000

Answers

Yes!

-- dinosaur (dinosaur@williams-net.com), February 01, 2000.

>> I do not understand the NASDAQ and how it relates to the DOW <<

The NASDAQ is a stock exchange, similar to the NYSE. Several thousand stocks are listed on the NASDAQ exchange.

The NASDAQ index is a broad measure of how all those stocks are doing, weighted by how big the companies are. That is why Microsoft and Intel alone make up a huge amount of the index. Most NASDAQ companies are much smaller fish!

The DJIA is calculated based on the price of just 30 selected stocks. Only two of these 30 are listed on the NASDAQ exchange. The rest are listed on the NYSE. The calculations for the DJIA are very arcane, since they try to provide continuity across an entire century since the average began, while at the same time the stocks in the DJIA keep being replaced.

>> So, my question is, if the NASDAQ were to bomb out, would it necessarily take the DOW with it ...(?) <<

There is no *necessary* connection between the price of any two different stocks. So, in theory, the NASDAQ could go almost to zero, while the DJIA could triple, both events happening simultaneously.

But that is just theory. In the real world, there is a real connection between them. All stocks are valued based on investor beliefs about the future earnings of the companies who issue the stocks. (In some cases, such as the infamous "dot.coms", those beliefs about future earnings are mostly built out of airy nothing and soaring hope raised up on stilts of greed.)

There is simply no chance that investors would revalue most of the NASDAQ stocks sharply downward unless they believed that the economy was heading downward. Under those circumstances, they would also reassess the DJIA stocks in the same light.

Also, once the trend of lower stock prices was established, it would become a self-reinforcing trend. As today's "stock-rich" consumers became "stock-poor", they would start borrowing less, spending less, and going bankrupt more often. This would eat away at the foundations of the USA economy, because fully 65% to 70% of that economy is based on consumer spending. As the economy shrank, the future earnings of most stocks would appear bleaker.

-- Brian McLaughlin (brianm@ims.com), February 01, 2000.

Rob, Due to the inherent nature of the equity markets and the known psychology, panic selling in one major market would correspondingly result in panic selling in another. It`s classic human behavior. It`s the nature of the "beast".

-- NoJo (RSKeiper@aol.com), February 01, 2000.

Thanks a lot guys - I've invested a bit in S&P futures with other people, but as you can guess, I've depended on their info more than anything I know. This is quite helpful.

Rob

-- robert bright (roosterbos@go.com), February 02, 2000.