Greg Guenthner

Dave Gonigam in yesterday’s 5 Min. Forecast. “Any chart of the index that goes back more than a couple of years is an apples-to-oranges comparison. Come Sept. 23, seven of the Dow’s 30 components will be new arrivals within the last six years. Two of those slots have turned over twice during that span.”

Dave’s gripe is in reaction to the Dow’s upcoming musical chairs act. Alcoa, Bank of America, and Hewlett-Packard are getting axed from the Big Board. Taking their places will be Goldman Sachs, Visa, and Nike.

He’s not alone. Plenty of pundits and analysts are bemoaning the switch. After all, the Dow Jones Industrial’s new additions aren’t exactly industrial powerhouses. The NYT’s Economix blog reminds us that back when the Dow first expanded to 30 names, it was filled with companies that actually made stuff. Just look at these names: American Can, General Railway Signal, Victor Talking Machine…

But if you’re crying about the Dow’s shunning of true industrial names, you’re about 30 years too late. 1982 marked the beginning of the shift, when it added American Express. And even that was a long time coming, considering US manufacturing peaked decades earlier…

Plus, it’s important to note that the ole’ Dow has its own set of problems. Its structure is different from the other major indexes. The Dow is price weighted. The higher a component’s share price, the more it will pull or drag on the average. So the low share prices of Alcoa and Bank of America weren’t exactly balancing things out…

If the Dow is supposed to be a crude representation of our economy, it’s doing a decent job with its banks, discount retailers, and junk food makers.

Bottom line: the Dow shakeup is a non-event. If you want a better representation of the broad market, look to the S&P 500 or the Russell 2000. The Dow is a great number to put on the evening news–but those 30 companies aren’t the first and last word when it comes to market performance.

Regards,

Greg Guenthner
for The Daily Reckoning

P.S. There’s more to this story than we reveal here… In this morning’s Rude Awakening email edition I explained how you could actually make a buck off the Dow’s changeover. If you didn’t get it, we suggest you sign up for free right here. There will me another tip in tomorrow’s issue.

You May Also Like:


Bullied Into Believing the Taper Talk

Greg Guenthner

Don't be embarrassed. If you believed all the "taper talk" you certainly weren't alone. There were plenty of other people who speculated on what would happen if the Fed scaled back its bond purchase program. The question now, is, since the Fed didn't taper, what does it mean for the markets? Greg Guenthner has the answer...

Greg Guenthner

Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.

Recent Articles

The Coming May “Oil Buy Signal”

Matt Insley

According to the EIA, U.S. oil production is set to peak in May as shale drillers cut back enough to actually cause a decrease in oil output. As Matt shows, we can expect oil prices to stabilize soon after, meaning now is a great time to pick up well-run oil companies before they too rebound.


Turkey’s Long-Term Potential and Short-Term Problems

James Rickards

Notes from Jim Rickards' recent trip to Istanbul, where he met with “the Donald Trump of Turkey"... central bank officials... and others. It was a great chance for him to gather market intelligence on the world’s eighth-largest emerging market. Read on...


Gold is (Once Again) Money

James Rickards

Few understand how to value gold, and even fewer understand that gold is not really an investment — it is money. Jim Rickards illustrates this point further and gives you actionable methods to accumulate wealth in gold. Read on...


Assessing a Measles Outbreak in Your Neighborhood

Stephen Petranek

With summer vacation on the horizon across the United States, kids who are carrying measles from states hard hit like California and Arizona will be mingling to with kids from other states with almost no cases. And officials are still wary about this year’s mini-epidemic. Stephen Petranek has more…


Researchers Create New Superfood

Stephen Petranek

Rice is one of the world’s most important crops. Three billion people depend on it as a staple every day. But climate change is wreaking havoc on rice production. Stephen Petranek has more on the steps researchers are taking to protect one of the world’s most important foods.