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Market indices

Market indices are simply the weighted averages of the prices in a subset of the universe of stocks. The "Dow" (Dow Jones   Industrial Average) uses thirty high capitalization companies at the core of the American economy. The S&P-500 is based on a   broad cross section of medium to high capitalization companies spanning the whole range of economic activities. The NASDAQ   Composite Index has as its focus newer and more dynamically changing enterprises. Each index thus represents a different facet of   the economy, or – more properly - the consensus view or paradigm of the near to intermediate term (6 months to a year) prospects thereof.

Recalling our earlier analogy (cork floating on the ocean) that individual stocks are strongly coupled to the market "tides", then   one would expect that the zig zags in market indices should parallel those seen in individual issues. In filtering out the individual   idiosyncrasies of single stocks or stock groups, the indices preserve the most basic aspects of the herd psychology, or as it's more   delicately phrased, the "mood of the market". Since MIDAS tries to quantify this psychology, there is hope that it will have some   applicability.

Without further preamble, then, in the first figure we apply the full MIDAS armamentarium to the Dow from 1988 to   the present. (We shall henceforth display only charts generated by the WINMIDAS software, since - captioning aside - the entire   chart can be produced from scratch in well under five minutes!) If we restrict attention to the seven year period prior to December   1994, it is seen the Dow was reasonably well characterized by a three-tier hierarchy of MIDAS support levels, with a pullback to S3 in mid December 1994.

Furthermore, a TOPFINDER (T2) launched on 10/15/90 did a good job of accommodating the three main trend reversal points in   that time period. The fact that this TOPFINDER has about 662 trading days (about 2 1/2 calendar years) of "fuel" left leads one to   be generally sanguine about the long term trend of the market and by implication - of the economy over this future span of time.

Since December of 1994, the market has taken off on an uncharacteristically monotonic rise which has every technician asking   "where will it end?". Accordingly, in the second chart we apply TOPFINDER to this rise in the Dow. (To appropriately dovetail   with the first chart, the labels here should read S4 and T4 ). The chart was generated on 7/13/95 and at that time we circled   ("ellipsed" would be more appropriate) the fact that TOPFINDER gave the market only two more trading days until a predicted top of 4775 on July 17th.