Distorted Dow

This is what we discussed with my trader group Wealthpot9 on 30th Jan 2009. And this is also the reason why i do not trade the DJIA these days.


Bianco: The Dow is Distorted
January 21, 2009



Guest commentary by James A. Bianco, Chief Executive Officer, of Bianco
Research, LLC



Comment - The Dow Jones Industrial Average (DJIA) is a price weighted index.
The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock
loses, the index loses 7.96 points, regardless of the company's market
capitalization.



Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock
that gets below $10 gets tossed out. As of last night's close (January 20),
The DJIA had the following stocks less than $10...



Citi (C) = $2.80

GM (GM) = $3.50

B of A (BAC) = $5.10

Alcoa (AA) = $8.35



If all four of these stocks went to zero on today's open, the DJIA would
lose only 157.3 points.



The financials in the DJIA are...

Citi (C) = $2.80

B of A (BAC) = $5.10

Amex (AXP) = 15.60

JP Morgan (JPM) = $18.09

If every financial stock in the DJIA went to zero on today's open, it would
only lose 331.25 points, less than it lost yesterday (332.13 points).



If you want to add GE into the financial sector, a debatable proposition,
then:



GE (GE) = $12.93



If the four financial stocks above and GE opened at zero today, the DJIA
would only lose 434.24 points.



The reason the DJIA is outperforming on the downside is the index committee
is not doing it job and replacing sub-$10 stocks and the financials are so
beaten up that they cannot push the index much lower.



So what is driving the index? The highest priced stocks:



IBM (IBM) = $81.98

Exxon (XOM) = $76.29

Chevron (CHV) = $68.31

P&G (PG) = $57.34

McDonalds (MCD) = $57.07

J&J (JNJ) = $56.75

3M (MMM) = $53.92

Wal-Mart (WMT) = $50.56



For instance if all the sub-$10 stocks listed above, all the financials
listed above and GE opened at zero, the DJIA loses 528.63 points. To repeat
if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63
points.



If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has
more influence on the index than all the financials, autos, GE and Alcoa
combined.



The DJIA is not normal as the Index committee is not doing their job during
this crisis, possibly because to the political fallout of kicking out a Citi
or GM. As a result, this index is now severely distorted as it has a tiny
weighing in financials and autos.



We thank Jim Bianco for giving us permission to share his firm's research
with our readers.

by MadScientist
on Fri Jan 30, 2009 3:48 pm