The Dow Jones Performance – Is it Real or a Mirage?

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SouthAmerica

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October 19, 2006

SouthAmerica: If the Index is not doing as well as you want then replace the losers with stocks with better prospects for the future.

I wonder what the index would look like if the dogs still as part of the Dow Jones Index.

It is similar as if a company were allowed to use on the calculation of its performance only the divisions that were making money – when a division started losing money they were dropped from the calculation on behalf of a better bet.



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DJIA - Components

The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of The Wall Street Journal. When companies are replaced, the individual weightings are adjusted so that the value of the average is not directly affected by the change.

On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications. Intel and Microsoft became the first two companies traded on the NASDAQ exchange to be listed in the DJIA.

On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG.

On December 1, 2005 AT&T's original T symbol returned to the DJIA as a result of the SBC Communications and AT&T merger.

The Dow Jones Industrial Average consists of the following 30 companies:

· 3M Co. (NYSE: MMM) (conglomerates, "manufacturing")
· ALCOA Inc. (NYSE: AA) (aluminum)
· Altria Group, Inc. (NYSE: MO) (tobacco, foods)
· American International Group, Inc. (NYSE: AIG) (property & casualty insurance)
· American Express Co. (NYSE: AXP) (credit services)
· AT&T Inc. (NYSE: T) (telecoms)
· Boeing Co., The (NYSE: BA) (aerospace/defense)
· Caterpillar, Inc. (NYSE: CAT) (farm & construction equipment)
· Citigroup, Inc. (NYSE: C) (money center banks)
· Coca-Cola Co. (NYSE: KO) (beverages)
· E.I. du Pont de Nemours & Co. (NYSE: DD) (chemicals)
· Exxon Mobil Corp. (NYSE: XOM) (major integrated oil & gas)
· General Electric Co. (NYSE: GE) (conglomerates, media)
· General Motors Corporation (NYSE: GM) (auto manufacturers)
· Hewlett-Packard Co. (NYSE: HPQ) (diversified computer systems)
· Home Depot, Inc. (NYSE: HD) (home improvement stores)
· Honeywell International, Inc. (NYSE: HON) (conglomerates)
· Intel Corp. (NASDAQ: INTC) (semiconductors)
· International Business Machines Corp. (NYSE: IBM) (diversified computer systems)
· JPMorgan Chase and Co. (NYSE: JPM) (money center banks)
· Johnson & Johnson Inc. (NYSE: JNJ) (consumer and health care products conglomerate)
· McDonald's Corp. (NYSE: MCD) (restaurant franchise)
· Merck & Co., Inc. (NYSE: MRK) (drug manufacturers)
· Microsoft Corp. (NASDAQ: MSFT) (software)
· Pfizer, Inc. (NYSE: PFE) (drug manufacturers)
· Procter & Gamble Co. (NYSE: PG) (consumer goods)
· United Technologies Corp. (NYSE: UTX) (conglomerates)
· Verizon Communications (NYSE: VZ) (telecoms)
· Wal-Mart Stores, Inc. (NYSE: WMT) (discount, variety stores)
· Walt Disney Co., The (NYSE: DIS) (entertainment)


The DJIA is criticized for being a price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts. This can produce misleading results, as a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change. Additionally, the inclusion of only 30 stocks in the average has brought on additional criticism of the average, as the DJIA is widely used as an indicator of overall market performance.

Another issue with the Dow is that not all 30 components open at the same time in the morning. Only a few components open at the start and the posted opening price of the Dow is determined by the price of those few components that open first and the previous day's closing price of the remaining components that haven't opened yet; therefore, the posted opening price on the Dow will always be close to the previous day's closing price (which can be observed by looking at Dow price history) and will never accurately reflect the true opening prices of all its components. Thus, in terms of candlestick charting theory, the Dow's posted opening price cannot be used in determining the condition of the market.


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“Dow soars past the 12,000 milestone”
By David Litterick in New York
Published: 19/10/2006
The Daily Telegraph - UK

The Dow Jones Industrial Average soared past the 12,000 mark yesterday for the first time in its 110-year history, as a clutch of good corporate earnings powered the index further into record territory.

Although the critics countered that 12,000 was merely a number of little technical importance, passing the milestone was seen as vindication for economists and analysts who believe that the United States is poised to achieve a perfect soft landing.

The Dow Jones Industrial Average was first launched in May 1896, with just 12 stocks. It took more than 100 years to creep up to its first close above 6,000.

But it has picked up speed since then, taking just 10 years to add another 6,000 points. Only one stock, General Electric, remains from the original "Dow Dozen".

The market shot out of the blocks yesterday, adding around 100 points within the first half hour to trade at 12,050, although the Dow later gave up some of those gains.

The strong early performance was due in part to strong earnings from IBM, which posted a 47pc rise in profits fueled by an improved performance in all its software, hardware and services units.

Shares of Intel too jumped more than 3pc as confidence that the chip company had put its recent problems behind it offset a fall in revenues. Even Yahoo, whose profits were as disappointing as many people had feared, saw its stock rise after it said a new improved Web search system was ready for shipping.

Outside the technology sector, JP Morgan followed its banking rivals to post profits that were higher than Wall Street had been expecting. Inflation data published yesterday was largely benign.

Prices fell 0.5pc in September, taking the annual rate down from 3.8pc to 2.1pc.

Although the much-watched core rate edged up 0.2pc on the month, taking the year-on-year rate to a 10-year high of 2.9pc, the rise was no worse than forecasts and most economists believe that figure has now peaked and will edge downwards into next year.

There was even good news from the housing market, the slowdown of which many believe could tip the US into recession. The Commerce Department reported that housing starts rose 5.9pc in September, better than the 1.2pc decline expected. Future earnings reports will also be an important factor in determining whether the market can continue to rally.

Stocks in the S&P 500 have posted double-digit earnings growth for 13 quarter in a row, and are set to do so again this quarter which would be the longest stretch on record.

However with the economy set to slow - albeit to a pace that would still be hailed a success in Europe - the growth in corporate profits may slow next year too. The S&P 500, which is considered by most a more important indicator than the Dow, is still more than 150 points shy of its all-time high of 1,527.

It means few economists see the markets extending gains too much further.

"I think the market is extended and due for a pullback, and this suggests that there's some short-term weakness ahead," said Steve Shobin, chief investment strategist at AmeriCap Advisers.

However he said he was generally confident about the markets and said he would see any falls as an opportunity to buy.


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Although I generally agree with the article, let's do the math and we will get to a funny conclusion, namely they would have been better off leaving those companies in.

Price change since 2004 Apr:

PFE : 38 - 28
AIG : 75 - 67
VZ : 37 -37

The old ones:

T: 25 - 33 (no shit)
EK: 26 - 23
IP: 42 - 35

Now I didn't weight the companies but treated them as equal, so that might give us a different result.The new companies lost on average 12% since they were introduced to the Dow. The replaced ones were sligthly above breakeven on average. (1%)

Thus had they left everything as it was before 2004 Apr, the Dow would be about 1.2 % higher (because 12% loss divided by 30/3 which is 10).

So this last change is actually an evidence to the contrary what the article states... :)

P.S.: I am too lazy to do the same stats for the previous change, but I wouldn't be surprized to find the same, because for example Chevron was replaced by Microsoft??

CVZ: 45-65
MSFT: 55 - 30

Hello Dolly.... :)
 
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Pekelo: Although I generally agree with the article, let's do the math and we will get to a funny conclusion, namely they would have been better off leaving those companies in.


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October 19, 2006

SouthAmerica: By the way, today is the anniversary of Black Monday.

Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) fell dramatically, and on which similar enormous drops occurred across the world. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, the United Kingdom 26.4%, the United States 22.6%, and Canada 22.5%.


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Today, the Dow Jones figures it does not reflect the following negative facts.

On your analysis you picked the information to show that it did not matter much the changes that were made on the performance of the Dow Jones Index since 1999.

But you forgot to mention the following:

1) Goodyear Tire and Rubber Company

November 1, 1999 - $ 34.15 per share

October 19, 2006 - $ 14.28 per share.



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2) Sears Roebuck Co.

Sears has been a real dog since November 1999 and had to be merged with another dog

K-Mart on November 2004. (After K-Mark got rid off its debt on bankruptcy court)

Sears formerly traded on the New York Stock Exchange (NYSE) under the ticker of "S", which is now used by the Sprint Nextel Corporation. Sears, Roebuck and Company is also a former Dow Jones Industrial Average component, listed from January 22, 1924 to October 29, 1999.

Merger with Kmart

In November 17, 2004, Kmart announced its intentions to purchase Sears. As a part of the merger, the Kmart Holdings Corporation would change its name to Sears Holdings Corporation. The new corporation announced that it would continue to operate stores under both the Sears and Kmart brands.

Sebastian S. Kresge founded the S. S. Kresge Company, the predecessor of Kmart, in 1899 in Detroit, Michigan.

Kresge's first retail establishment, a five-and-ten-cent store, resembled Woolworth's, a chain operated by Frank Woolworth. The store grew into a chain known as S. S. Kresge. It was incorporated in 1912, by which time it operated eighty-five stores.

During the 1970s, Kmart put a number of competing retailers out of business.

In 1977, S. S. Kresge Corporation changed its name to Kmart Corporation. In 1987, the Kmart Corporation sold its remaining Kresge and Jupiter stores to McCrory Stores.

Bankruptcy

Kmart's lime green prototype logo. This logo was only used at five prototype Kmart locations nationwide.

On January 22, 2002, Kmart filed for bankruptcy protection; led into the bankruptcy by its then chairman Chuck Conaway and president Mark Schwartz. Similar to the Enron scandal, Conway and Schwartz were accused of misleading shareholders and other company officials of the company's financial crisis, while they were allegedly making millions and allegedly spending the company's money on airplanes, houses, boats and other luxuries.

After dismissing Conaway and Schwartz, Kmart closed more than 300 stores in the United States and laid off around 34,000 workers as part of a restructuring. On May 6, 2003, Kmart officially emerged from bankruptcy protection as the Kmart Holdings Corporation and on June 10, 2003, it began trading on the NASDAQ as "KMRT."


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3) Union Carbide

Another company that was not doing well in November 1999 and had to merge with another company in February 2001.

Union Carbide Corporation, headquartered in Danbury, Connecticut, is a United States chemical manufacturer, now a subsidiary of The Dow Chemical Company. The company is most well-known for the Bhopal disaster in 1984, in which the leakage of the highly toxic gas methyl isocyanate (MIC) killed thousands in Bhopal, India.

They became a fully owned subsidiary of The Dow Chemical Company on February 6, 2001.


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Quote from southamerica:



On your analysis you picked the information to show that it did not matter much the changes that were made on the performance of the Dow Jones Index since 1999.
More...

Nope. I ASSUMED that if it was similar than the changes in 2004 Apr, maybe they would have been better off leaving the DOW like it is. I couldn't find info (and was lazy too) on UC and Goodyear. Thanks for the info.

An objective comparison is impossible because 2 of the 4 replaced companies merged. Nevertheless the change occured at the top of the tech bubble, and 2 of the new companies were such. For full disclosure, here are the drops between today and then:

MSFT: 55 - 30
INTC: 40 - 20
HD: 55 - 35
SBC: 50 - 34

In the 4 replaced companies at least 1 made a decent rally, you can't say such a thing about the 4 new ones...Each dropped 40-50%, let's say average 40%.

Without weighting them, the 4 new companies pulled the DOW down by 40/13.3=3%
 
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Pekelo: An objective comparison is impossible because 2 of the 4 replaced companies merged.


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SouthAmerica: I agree with you.

The talking heads make too much of a big deal about the Dow Jones Index, when the S&P 500 it is a much better guide to what is going on in the US economy.


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June 2, 2009

SouthAmerica: In the last nine months there were many times when I thought the Dow Jones Index was being manipulated – probably by a small group of people who coordinated their buying in the last half hour of trading to push the price of certain stocks up. (they push stocks up at the end of the day usually with very thin trading)

The smell of market manipulation has been in the air for quite a while.


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I found in the web a market analysis from Hedgehog University Stock Market Analysis - Week Ending Friday, February 22nd, 2008 and I quote the following:

“As of February 19th, 2008, two stocks will be added to the DJIA and two stocks will be deleted. Some of the history of the DOW is that the 30 stocks represent resilient corporations with great management. Over the years, we have watched IBM flounder, then recover. We watched AT&T change and get dropped. We have seen new kids on the block added such as MacDonald's, Disney and Walmart.

There is a saying that as GM goes, so goes America. We've been watching GM flounder and wondering if at some point it would be dropped the DOW. GM is scrambling like crazy these days trying to not become a Ford or a Chrysler and to stave off the challenge by Toyota. Will GM be an IBM and rise to the top again? Time will tell. And if GM does not, then will that indicate that the American economy is really in serious trouble?”

http://www.hedge-hog.com/hhu/djia1.htm


As the above analysis imply if GM was forced to file for bankruptcy – “then will that indicate that the American economy is really in serious trouble?”

I have a gut feeling that that is the case - the American economy is really in serious trouble!!!

GM is the largest industrial company bankruptcy in world history.

First, the entire financial system collapses in a spectacular meltdown. Now the industrial sector collapses with the bankruptcy of Chrysler and then General Motors in a matter of weeks of each other.

There's nothing left behind other than the major US government bailouts and guarantees to give the false impression that the US economic system still alive and well.

The bankruptcy of GM is a bigger blow to the US capitalist economic system than the experts and all kinds of talking heads want to admit in public.

GM will be replaced by Cisco in the Dow Jones Average. Cisco is a great company, but Cisco does not have the iconic image of a GM – GM is one of the major symbols of the industrial power of the United States economy.


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http://en.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average


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Will the 'New Dow' Shatter The 200-Day Moving Average?
By: Simon Maierhofer
ETFguide.com - On Tuesday June 2, 2009

It doesn't happen often, but when it does; it's kind of a big deal - changes to the Dow Jones (NYSEArca: DIA - News).

Those changes, however, are becoming more frequent. On September 22, 2008, Kraft Foods (NYSE: KFT - News) replaced American International Group (NYSE: AIG - News).

Ever since then, the Dow has been underweighted in financials. The reduced financial exposure explains why the Dow has performaned better than the S&P 500 (NYSEArca: SPY - News), over the past year or so. The Financial Select Sector SPDRs (NYSEArca: XLF - News) were the worst performing sector, up until the rally from the March lows.

On March 2nd, the ETF Profit Strategy Newsletter recommended to sell the previously acquired short ETFs and buy long ETFs, in particular financial related ETFs such as the Ultra Financial ProShares (NYSEArca: UYG - News).

As financials have seemingly recovered (more about that later), General Motors was forced to file for bankruptcy. This did not fase investors, as the Dow rallied over 220 points on economic news which was perceived to be positive.

Effective as of June 8th, Travelers (NYSE: TRV - News) will replace Citigroup (NYSE: C - News), while Cisco (Nasdaq: CSCO - News) will replace General Motors.

How new components are selected:

Composition changes are rare and generally occur following corporate acquisitions, or other dramatic shifts in a company's core business. When such an event necessitates that one component be replaced, the entire average is reviewed. The increased frequency of recent changes reflects the shift in economic momentum. Even blue chip stocks are far from recession resistant.

Constituents, or replacements, are selected by the editors of The Wall Street Journal. A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average.

Even though new to the Dow Jones, Cisco has been part of many other indexes/ETFs for years. The Nasdaq (Nasdaq: QQQQ - News), Technology Select Sector SPDRs (NYSEArca: XLK - News), and Russell 1000 Growth (NYSEArca: IWF - News) are just a few examples.

Travelers is actually a former unit of Citigroup. We are all familiar with Citigroup's recent history.

Will the 'new Dow' break through the 200-day moving average?

With yesterday's 2.60% gain, the Dow Jones has pushed up right against the 200-day moving average (MA). Many regard the 200-day MA as a powerful indicator. A break above the 200-day MA) is often viewed as a major shift in momentum, indicative of higher prices ahead. Will the Dow take out the MA resistance level?

The ETF Profit Strategy Newsletter expects the Dow to break through the 200-day MA. In fact, already in 2008, the newsletter forecasted new lows to be reached in Q1/Q2 of 2009 followed by the biggest rally since the 2007 highs. In February 2009, the range for a bottom was narrowed down to Dow 6,700 - 6,000, followed by a 30-40% rally.

How accurate is the 200-day moving average?

The Dow broke below the 200-day MA average around 13,000. Heeding the MA warning could have prevented a lot of losses. In a one-directional market, the 200-day MA works well. Once the stock market kisses the MA good bye, the MA will not be revisited unless a new trend is well underway.

We've seen this happen in the bull market of the late 90s where the market was one-directional (up), and in the bear markets starting in 2000 and 2007. The last up-signal received via the 200-day MA ,however, was a false alarm. The up-signal we may receive in the next few days/weeks comes after a mature 35% rally. Would you want to jump into the market after it's rallied 35% in less than three months?

Savvy investors always try to draw lessons from history. The only other bear market that has been equal to the current one, and could serve as a parallel, is the Great Depression. From the 1929 highs to the 1932 lows, the Dow Jones lost nearly 90%. In between that waterfall decline, spanning four years from top to bottom, there were five rallies ranging from 24% to 48%. What does that remind you of? Dj vu.

The mother of all questions

The key question is not whether the Dow will break through the 200-day MA. The key question is: Where is the ultimate low? As long as the stock market continues to proceed from lower highs to lower lows, the 200-day, or any other moving average, is of little use.

Just as a skilled artist uses a variety of brushes, techniques, and color tones to produce a fine piece of art; experienced investors rely on a combination of indicators and signals. No single indicator is infallible.

By using a composite of indicators, however, it is possible to discern the short, mid, and long-term direction with a high level of certainty.

The ETF Profit Strategy Newsletter draws from a wide range of indicators, some simple and some sophisticated, to put the market's action in context.

Similar to a puzzle where you frame all the border pieces first, long-term indicators are used to build the foundation - a long term forecast.

Once that is in place, mid and short-term indicators are used to fill in the 'center of the puzzle.' This approach resulted in calling a market top above Dow 9,000 in January 2009, and a market bottom below Dow 6,700 in March 2009.

Based on the 'big-picture' long-term indicator, the upcoming 200-day MA buy-signal will be another false alarm.

Moving indicators are lagging indicators. As such, the sell signal will come after the decline has started, while the next buy signal will likely be another 30% late. Can your portfolio afford inaccuracies of that sort?

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You know the "GM goes, America goes" quote is like a half century old, right? GM hasn't made a profit in 5 years. It's a subsidized basket case that needed to go bankrupt to flush out the old system.

By the way, the Dow is up 40% in three months. Has it ever crossed your mind that there's more than manipulation going on here?
 
Quote from 4444CJones4444:

You know the "GM goes, America goes" quote is like a half century old, right? GM hasn't made a profit in 5 years. It's a subsidized basket case that needed to go bankrupt to flush out the old system.

By the way, the Dow is up 40% in three months. Has it ever crossed your mind that there's more than manipulation going on here?
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Self-attribution bias. Those who are wrong about the markets blame forces that are out of their control (i.e. bad luck, MARKET MANIPULATION). Those who are right about the markets believe it is because of their own doing as opposed to forces that are out of their control. This applies to other areas of human nature as well, not just the stock market.

In this market environment (past couple of months):

Watch the posts from the bears - it's not their fault they're wrong! The market is being manipulated! The government is falsely propping up the markets! etc. etc.

Watch the posts from the bulls - they are very smart and the reason they're making money in this market is directly due to actions they've taken. Not a chance in hell I got lucky, it is all skill!

The best thing to do is remain humble. The market can fuck you at any moment.
 
Quote from Kassz007:

Watch the posts from the bears - it's not their fault they're wrong! The market is being manipulated! The government is falsely propping up the markets! etc. etc.

More...

This fits ET poster S2007S perfectly, along with all the other idiots that have no idea what their doing, and make the amateur mistake of thinking that the Economy has a direct correlation with the equity market.
 
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