Greg Guenthner

“The turnover in the Dow is getting ridiculous,” declared my colleague 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:


Stock Market Gives Congress the Finger

Greg Guenthner

The market continues to give congress the finger. Stocks appear bored with the reckless politicians and their quarrels. Of course, that won't last forever. And when the markets finally wake up and start fluctuating wildly again, Greg Guenthner has a few ideas on how to profit. Read on...

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 New Bitcoin Trend that Could Make You $100,000 Per Month

Josh Grasmick

Few investments have yielded better returns for early investors than Bitcoin. But now that the price has stabilized, are there any gains left to be made? Today, Josh Grasmick details one investable Bitcoin service coming online that could still lead early investors to massive profits... and with less speculation and risk. Read on...


Maestro
Preserve Your Wealth in the Face of Financial War

James Rickards

The Cold War introduced the world to a terrifying new phrase: mutually assured destruction. Thankfully the cold war ended without ever realizing this outcome. But the remnants of that "balance of terror" between the US and Russia still exist... and are beginning to surface in the financial sector. Jim Rickards explains...


How to Use Market Forecasts to Your Advantage

Greg Guenthner

'Tis the season for fall market predictions. But don't dust off that crystal ball just yet. Good traders don't try to predict when an important price move is going to happen - they just react when it does. However, as Greg Guenthner explains, forecasts can help you manage your risk/reward, as well as your non-trading portfolio. Read on...


The Awful Way Social Security Might Be “Saved”

Dave Gonigam

The US Social Security program is complete mess. The funds needed to pay these benefits are quickly drying up, and agreeable solutions are in short supply. But all is not lost... There actually IS a viable way to "save" Social Security. But as Dave Gonigam explains, you're probably not going to like it. Read on...


Important Facts You Need to Know the Ebola Outbreak

Stephen Petranek

This summer, the worst Ebola outbreak ever recorded hit sub-Saharan Africa. But the greatest danger, as Stephen Petranek explains, is that the virus will have a chance to mutate into a form that spreads more easily. And if that happens, there will be far reaching consequences - from both a health and an investment side. Read on...