Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What You Need to Know About the Dow Stock Index's Big Changes

Stock-Markets / Stock Markets 2013 Sep 12, 2013 - 01:41 PM GMT

By: Money_Morning

Stock-Markets

In the biggest Dow Index changes in nearly a decade, Alcoa Inc. (NYSE: AA), Hewlett-Packard Co. (NYSE: HPQ), and Bank of America Corp (NYSE: BAC) are being dumped from the closely watched 30-stock index.

Athletic gear maker Nike Inc. (NYSE: NKE) steps into the place of Alcoa, a Dow component for 54 years. Payments company Visa Inc. (NYSE: V) will unseat HP, which joined the blue-chip benchmark in 1997. And Goldman Sachs Group Inc. (NYSE: GS) replaces BofA, which joined the index five years ago.


The Dow changes take effect with the close of trading on Sept. 20.

The last time a Dow shake-up caused such a stir was in April 2004, when AT&T (NYSE: T), Eastman Kodak (currently in bankruptcy proceedings), and International Paper Co. (NYSE: IP) were removed and replaced with American International Group Inc. (NYSE: AIG), Pfizer Inc. (NYSE: PFE), and Verizon Communications Inc. (NYSE: VZ).

Created in 1897, the Dow has undergone a number of changes since its inception. General Electric Co. (NYSE: GE) is the sole surviving original member.

The Dow is up roughly 15% year to date - with no help from the three companies that were just shown the door...

Why Companies Get Removed from the Dow

According to a statement from S&P Dow Jones Indices LLC, the company that oversees the Dow, the changes "were prompted by the low stock price of the three companies slated for removal and the Index Committee's desire to diversify the sector and industry group representations of the index."

Unlike other indexes, which are weighted by members' market cap, the Dow is a price-weighted index. That means the greater the stock price, the greater the sway for a particular component (and thus the index) and vice versa.

So, the index aims not to keep too many low or very high priced stocks among its members. Given that explanation, Alcoa, BofA, and HP's dismissals appear warranted.

Alcoa, trading around $8.08, is down from $40 in 2007. Its elimination is especially symbolic. The aluminum company joined the Dow in 1959. For decades, its quarterly financial reports traditionally kicked off earnings season.

HP, at $22.36, is less than half the $50 it was trading at in 2010. An attempt at a turnaround, overshadowed by the revolving door in its chief executive officer's office, has been slow going. When added to the Dow in 1997, it was only the second computer company in the Dow (after IBM).

Bank of America, at $14.48, is down from $50 in 2007. It became a Dow member in November 2008. Since the financial crisis, BofA has been plagued with lawsuits stemming from its mortgage dealings, and it has been trimming business units.

The Dow newbies, each industry standouts, also reflect a changing economic landscape...

Visa shares have been on a tear, and the company is growing on the strength of new payment technology. Nike continues to grow revenue and shareholder value thanks to a loyal worldwide following. And Goldman recently reported that earnings doubled in the latest quarter.

The Dow changes are likely to bring greater movement in the benchmark when the new components are seeded. The three heavyweights, known to make big moves up and down, are replacing a much less volatile trio.

But there's good news in these Dow changes for those investing in these rejected stocks...

Dow Changes and Share Prices

While getting booted from the Dow might be an ego bruiser, it just might turn out to be fruitful misfortune.

According to an in-depth study by renowned finance professor Jeremy Siegel of the esteemed Wharton University, stocks that were kicked out of the broad-based S&P 500 Index, on average, outperformed the additions. Siegel's research measured all additions and deletion going back to the S&P's creation in March 1957.

The findings could be easily explained as follows: companies shown the exit are often suffering financially, while replacements are typically leaders in their respective fields.

MarketWatch likened the Dow's historical rotation to the amateurish trading faux pas of "buying high and selling low."

Following news of the Dow's upcoming dance, shares of Alcoa and HP were unchanged, while BofA shares were up 1.14%. Meanwhile, Goldman gained 3.3%, Visa soared 3%, and Nike sprinted ahead 1.53%.

Now don't miss today's main Money Morning story: How a 1% Gain Can Destroy Your Retirement Dreams (Part I)

Source :http://moneymorning.com/2013/09/10/big-dow-index-changes-what-they-mean-for-your-stocks/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules