Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
A massive change in the stodgy Dow Jones Industrial Average announced this morning… as the headline says, 3 companies in – 3 companies out. Of the 3 out only Bank of America surprises as it is one of the major financial institutions of America. But it is being replaced by … well for better or worse, one of the major financial institutions of America. Insert illuminati commentary here hah. Visa and Nike make a lot of sense – Alcoa is an old school narrow niche company, and HPQ has been in a struggling mess for years as their computer business slows.
While the DJIA is more of an index for non financial people (the S&P 500 is far more important to those who watch the market day to day), these changes will have a huge impact as the DJIA is the ONLY major index to be price weighted. That means the higher the stock price the more impact on the index. You replace 3 low price companies (from $8 to $22) with 3 high price companies (from $65 to $178). IBM with its $185 price was far and away the most dominant component of the DJIA. The price weighting never made sense but it is what it is. So with these changes the financials are going to be far more impactful on the DJIA price with Goldman Sachs and Visa now challenging IBM for top dog in price. To put it into perspective aside from IBM there were only 4 other companies >$100 in stock price (and most were very close to $100), but now there will be 2 more >$100 and both over $150.
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